Life insurance for parents

You’ve bought life insurance for yourself and your spouse, but now you’re wondering if there’s another piece of your financial puzzle missing. Do you need to buy an insurance policy for your aging parents?

If your parents have cosigned a loan or credit card with you, provide critical childcare, or you’re not sure how you’d survive financially without their income, a life insurance policy might be a good option to protect yourself and your loved ones. Or if your elderly parents haven’t put aside money for end-of-life costs like funeral expenses, life insurance can help with those expenses.

Whatever the reason, buying life insurance for your parents can seem like an appealing option when you want to feel fully prepared for life’s eventualities. But buying life insurance for someone else is complicated and in most cases, it makes more sense for your parents to purchase their own life insurance policies and name you as the beneficiary.

Can you buy life insurance for your parents?

Yes, you can purchase life insurance for your parents, but it can be difficult to take out a life insurance policy on someone other than yourself, even if that person is related to you.

When you buy life insurance for yourself, you are both the policyholder and the named insured, or the person whose life is being insured by the policy. You then choose a different person or multiple people as your policy’s beneficiary.

To take out a policy where the policyholder and the named insured are two different people, you’ll have to prove that you have insurable interest, meaning that you’ll suffer financially if the named insured dies.

This is really hard to prove if you’re an adult child buying a policy for a parent and is rarely approved by insurers. You also cannot apply for life insurance for another person without that person’s consent because they need to physically sign the policy into force.

You’re much more likely to secure life insurance coverage for your parent if you help them apply for a policy that they will own and name yourself as the beneficiary. You can still pay the premiums even if your parent owns the policy.

What type of life insurance should you get for your parents?

If you're purchasing a life insurance policy for your parents, you need to evaluate their needs to determine what type of policy they should get. Term life insurance lasts a set period of time, while whole life insurance policies and final expense or guaranteed issue life insurance policies are permanent and can be costlier.

It's important to consider the type of policy that is best suited to your needs and your parents’ needs — and answers why you want to take out a life insurance policy on your parents in the first place. As we mentioned, not all policies can be taken out on behalf of your parents. Term life and whole life insurance policies are difficult to buy on someone else’s behalf, but final expense life insurance is a good option if you know you’ll be the one purchasing the policy (and if you’re only looking for a small benefit amount).

Term life insurance

Term life insurance only lasts between 10 to 30 years (depending on the term length you select) before it expires. A term life insurance policy covers the basics — it pays out a death benefit to your parents' beneficiaries if they die while the policy is in force, and offers the most affordable rates compared to other types of life insurance policies.

If the death of a parent would lead to a substantial loss in income, having to replace their role in the household (for example, if they are a caregiver for your child), or if you or someone else would have to take on their debts, then term life insurance might be the best option. However, your parents will need to apply for this type of policy themselves.

Whole life insurance

Whole life insurance is a type of permanent life insurance that lasts for the policyholder's entire life, which makes it far costlier than a term life insurance policy. It also comes with a cash-value component that can be used as a forced savings vehicle.

Based on the cost, most people don't need a whole life insurance policy. Your parents can get the same amount of coverage for a lower cost with a term life insurance policy, but they will have to apply for it on their own.

Final expense life insurance

One type of life insurance policy that is easier to purchase on behalf of your parents is final expense insurance.

Also called burial insurance, final expense insurance is a type of permanent life insurance that will last until your parents die, provided you keep paying the premiums.

You’ll still need your parent’s consent to apply for this policy. And while there is no medical exam required, your parent will have to answer some medical questions and the policy won’t be issued if they currently have a terminal illness or condition (more on that below).

How much does final expense insurance cost?

Final expense insurance monthly premiums can range from $50 to several hundred dollars, depending on the insured’s age and location. These policies are available for death benefit amounts from $5,000 to $25,000 (though some companies may provide a benefit of up to $50,000), based on policies offered by Policygenius in December 2020.

If you’re really worried about being able to pay for end-of-life expenses for your parents, this type of policy may make sense. But if you expect your parents to live many more years, it almost always makes more sense financially to invest the money you would have put towards the premiums, and then use that money to fund a burial.

Keep in mind, final expense policy premiums often end up being higher than the death benefit payout. And, like most types of life insurance, if your parent dies within two years of the policy being purchased (known as the contestability period), most insurers will not pay the benefit — you’ll just get a return of premiums paid.

Guaranteed issue life insurance

If your parent has a terminal illness or other serious medical condition, they will not qualify for final expense insurance. However, they can purchase a product called guaranteed issue life insurance. The premiums are much higher, but no medical questions are asked during underwriting. This is truly a last resort insurance product, and is rarely worth the high cost.

See below for a cost comparison of a final expense policy and a guaranteed issue policy for a 70-year-old man:

Cost comparison: final expense insurance vs guaranteed issue

Methodology: Rates are calculated for a 70-year old male non-smoker in Columbus, Ohio, who qualifies for a preferred rate class. Not all policies in this calculation are available in all states. Rates may vary by term, policy amount, health class and state. Rate illustration valid as of 12/17/2020.

How to get life insurance for your parents

1. Talk to your parents. The first step is to get your parent’s consent to purchase the policy for them. You can’t do it in secret — that would be fraud – and they must be able to complete and answer application questions. If your parents have advanced dementia or Alzheimer’s, reach out to a licensed life insurance agent before proceeding.

2. Get quotes. Final expense insurance costs are based on age and location. You can get an idea of the policies available and the monthly premiums by using our life insurance quote tool and choosing a policy coverage amount under $50,000.

3. Choose beneficiaries. To avoid being taxed on the death benefit (and to ensure the money ends up in the right hands) it’s important to choose the policy’s beneficiaries wisely. If your parent is taking a policy with the intention of having the benefit pay out to you, make sure they name you as the policy beneficiary. And if you’re the policyholder on your parent’s final expense policy, don’t forget to name yourself as the beneficiary too. Also keep in mind that life insurance policies without named beneficiaries pay into the insured’s estate when they die and would be subject to estate taxes.

4. Pay premiums. Once your policy is in force, you or your parents must continue to pay the premiums. If you stop paying, the policy may lapse you will forfeit all previous premiums, and will not receive a death benefit.

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Tax implications of buying life insurance for your parents

Most of the time, life insurance proceeds aren't taxable and a life insurance policy can help your parents set up a tax-free inheritance to pass on. But there are a few instances when the benefit may be taxed:

• Their estate exceeds $11.58 million (if they die in 2020) or $11.7 million (if they die in 2021)

• The benefit payout skips a generation

• It is considered an asset and subject to an inheritance tax

• The payout is considered a "gift" and is subject to a gift tax

While the death benefit won't always be taxed in the above scenarios, it's important to talk to a financial adviser to make sure the policy you set up for your parents will pay out a tax-free sum.

Alternatives to buying life insurance for your parents

If you’re worried about affording burial costs or other final expenses for your parents, you have a few other options:

• Encourage your parents to purchase their own life insurance policy and name you as the beneficiary. If they’re in good health, there are still several options for people over age 60, 70, and even 80.

• Set up a savings account to put aside money for end-of-life expenses for your parents, or encourage them to set one up and pay into it themselves.

• Pre-pay for funeral costs through a funeral home.