Life Insurance for Parents: Is It Worth Buying?
The circle of life comes back to us as we get older and have to care for our aging parents.
While you may have life insurance on yourself to protect your immediate family, it might also be worth considering protection for your parents.
As your parents age, their liabilities may become yours, especially upon their passing. If you want to offset the risk of financial stress, consider life insurance.
To help you make a decision, this insurance guide will go through everything you need to know before purchasing.
Can You Buy Life Insurance For Your Parents?
It may seem strange, but you can buy life insurance for your parents, as long as you meet the following requirements:
- You must prove that your parent’s death will impact you financially. For example, if you’ll be responsible for their debts or for paying their final expenses, you show that you have a financial interest in your parents’ death.
- You must have your parents’ consent. They must sign the application in order for you to move forward with the policy.
All insurance companies require that you meet both requirements, so make sure you have adequate proof of the financial impact it will have on you to prove the need for it.
Why is Life Insurance Important?
Buying life insurance for your parents is most important when you have a financial obligation upon their passing. A few common examples include:
Some life insurance policies offer early payouts to help cover end-of-life expenses, such as medical expenses. If your parents are chronically ill or have a fatal illness, the proceeds from the policy can help cover their medical costs, while ensuring their comfort during this time. The proceeds can also help settle any final hospital or medical bills incurred before their passing.
Knowing your parents’ debt situation is important. For example, if they’re leaving you their house but it has a mortgage on it, you’ll need funds to pay off the mortgage. Don’t forget about other debts, such as credit cards, collections, or tax bills. Any debt your parents have will become yours if the estate is yours.
Funerals are costly. At a minimum, expect to pay $10,000, but many funerals cost as much as $50,000 depending on the options chosen. Rather than trying to fund the funeral yourself, you can use the proceeds from a life insurance policy on your parents to cover it.
If you live with your parents or otherwise rely on them for income and would be without upon their passing, a life insurance policy can supplement your income.
If you inherit your parents’ estate, chances are that you’ll pay estate or inheritance taxes. How much you pay depends on where you live and the value of the estate. A life insurance policy can help offset this debt, as you navigate your parents’ estate.
How Much Coverage Do You Need?
There isn’t a one-size-fits-all amount of coverage that you need for your parents. It depends on their financial situation as well as yours. Consider the following:
- What are their current debt levels?
- Do they have a mortgage or outstanding loans?
- What are their current medical expenses like?
- What are their final wishes?
Next, you should consider what you want to cover. Are you looking for finances to cover their final wishes, but nothing else or do you need more coverage to cover debts or medical expenses?
Knowing your state’s requirements regarding your level of responsibility for your parents’ debts and/or their medical expenses will help you make the right decision.
No matter where you live, if your parents pass down their home to you and it has a mortgage on it, the mortgage must be satisfied.
If you plan to keep the home, life insurance proceeds can help pay the debt off, allowing you to live in the home without worry.
Which Coverage Is The Best?
When buying life insurance for parents, you have fewer options than you might when buying life insurance for yourself at a much younger age.
Remember that life insurance companies take on risks. They have to pay out benefits upon death and insuring ‘older people’ makes that risk higher, which often means more restrictions.
The best type of coverage for your parents is the coverage that offers what you need.
Do you need a policy that will pay out early if needed to cover medical expenses? Do your parents have health issues that would make getting term life insurance unaffordable? Are you looking for coverage just to cover your parents’ final arrangements?
Ask yourself these questions when choosing among the most common life insurance policies for parents.
Best Policies For Parents
While there are numerous types of insurance policies available that will vary by the insurance provider, below are the most common and best policies for parents.
Term Life Insurance
Choose term life insurance when you have a large debt, such as a mortgage to cover upon your parents’ passing. Term life insurance is good for a set term (10 to 30 years), but typically closer to 10 years for older people.
- Provides a set benefit upon passing.
- Has predictable premiums.
- Premiums are typically more affordable.
- If your parents are alive at the end of the term, the policy expires.
- Older people may have limited coverage (years and amount).
Whole Life Insurance
Whole life insurance doesn’t expire like term life. It lasts for your parents’ whole life. With the ability to earn dividends. It’s like an investment versus just an insurance policy.
- You get protection for your parents’ lifetime.
- The premiums typically remain the same for the entire policy.
- Your investment may grow.
- The premiums are more expensive than term life insurance.
- Earnings aren’t guaranteed on most policies.
Universal Life Insurance
Universal life insurance gives more flexibility around using the funds while your parents are still alive. This may help in situations where there are high medical bills or an immediate need for cash to satisfy an unexpected bill.
Like whole life, universal life has an investment component that gives your policy cash value.
- You get a set death benefit plus the cash value of the investment portion.
- You may use the cash value to cover the cost of the premiums if the policy becomes worth enough.
- You may withdraw earnings early or take a loan on the policy.
- Universal life usually comes with high fees.
- You don’t get a lot of say in where your money gets invested.
Final Expense Insurance
As the name suggests, final expense insurance helps cover the cost of your parents’ final arrangements, such as the funeral or burial. This policy, which is only for ‘older people’ typically has easier guidelines since it’s only for final expenses.
- Most companies don’t require a medical exam.
- You can earmark funds for your parents’ final expenses, taking the burden off you.
- The premiums are typically low.
- You can only use the funds for final arrangements, nothing else.
- The policy limits are typically low.
Other Suitable Policies
Parents with Serious Medical Conditions – Guaranteed Life Insurance
If your parents won’t qualify for any other type of ‘traditional’ policy, a guaranteed life insurance policy provides the ‘guaranteed’ coverage they need.
Insurance companies can’t deny them for any health conditions or age, but the coverage options are limited.
Affordable Coverage – Accidental Death Insurance
If money is an issue, but you worry about an accident taking your parents’ lives, accidental death insurance offers the most affordable option.
Anyone qualifies for the policy, but it only covers accidental death, not death due to natural causes.
Life Insurance Costs
Life insurance costs vary based on age, health, and type of insurance.
You can find policies for as little as $25 per month as well as policies that cost well over $300 per month. It depends on the type of coverage you want and the length of time you need it.
Avoiding Tax Obligations
Typically, life insurance payouts aren’t taxed unless you exceed the threshold which is more than $11.2 million. However, when you insure your parents, there’s a twist.
The Goodman Triangle occurs where there’s the insured (your parents), the policy owner (you), and the beneficiary (others). If you pay out benefits to others, you may experience unexpected tax liabilities.
Other Tax Situations
If you do find yourself in a situation where you are the owner and there are other beneficiaries, consider the following options:
- Payout only up to the gift limit before taxes are incurred. In 2020, that limit is $15,000.
- Don’t be the ‘owner’ of the policy. Instead, be the payer, but only do this if you aren’t the beneficiary of the payouts.
- Should both parents have life insurance?
Yes, both parents should have life insurance. Even if only one parent ‘earns an income,’ the other parent likely brings value to the relationship.
Whether that value is as a parent, homemaker, or any other ‘value’ there are services that the survivor will have to replace and likely pay for in the absence of their partner.
- Can a stay at home mom get life insurance?
Yes, a stay at home mom can get life insurance and in fact, she should get it.
Again, because stay at home moms add value to the relationship, it turns into a monetary issue in their absence.
Who will care for the children and the home in her absence? If you have to pay for childcare, schooling, or other services, you need the money to do so.
On average, stay at home moms should have between $250,000 and $400,000 in insurance, but that amount can be higher or lower depending on the wealth of the family.
- What are the age restrictions with older parents?
Many insurance companies stop offering coverage at 80 or 85-years old.
If you do find a policy, chances are its premiums will be very high or you may be subject to a 2-year waiting period, which if your parent(s) are sick, could be an issue.
If your parents are up in age, a “final arrangements policy” is typically best.
- Can you buy insurance if your parents are in bad health?
Yes, there are options even for parents in poor health. You may be restricted to guaranteed life policies or final arrangement policies if their health is truly poor, but shop around to find the right answer for your parents.
Not all issues are as bad as you may think and each insurer looks at things differently.
- What factors affect premium rates?
Insurance companies base rates on the risk of a payout. In other words, the older your parents are or the poorer their health, the higher the premium rates.
You are better off buying a policy as early as possible in order to secure lower rates.
- Who should be the beneficiary of the policy?
Typically, you are the owner and the beneficiary of the policy, but this decision is up to your parents as it’s their policy.
How To Buy A Policy
Use the following steps to buy a life insurance policy for your parents:
- Choose the type of insurance – Decide if you want term, whole, universal, or final arrangements insurance.
- Choose a coverage amount – Think about what debts or expenses you need covered, this will help you choose the right coverage amount.
- Shop around – Each insurance company will have different requirements and charge different premiums, find the policy that suits your parents’ needs the most.
- Choose the owner and beneficiary – Talk with your parents about who will own (pay for the policy) and who will be the beneficiary of the payout.
- Complete an application – Once you choose a policy, apply for it and follow the requirements of the underwriter to get final approval.
Buying life insurance for your parents can be a financially sound decision that saves you a lot of headaches during your time of grief.
The earlier that you shop for a policy, the less expensive it may be and the better coverage will be available to you.