Life insurance for parents
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Life insurance policies offer families a sense of security in the event of a loss. While it may seem obvious to insure the financial contributors in your family, you may also want to consider getting life insurance for your parents, whether they provide a significant financial contribution or not. This article will explore the reasons why, as well as technical aspects involved in the process.
Can I buy life insurance for my parents?
Technically you can pay for your parent’s life insurance premium, but it can be difficult to take out a life insurance policy on behalf of someone other than yourself. If you want to purchase a policy for your parents, you must prove that you have an insurable interest, meaning that you depend on them financially and would struggle in the event of their death. Even if you have an insurable interest, many insurance companies will not approve your request.
Alternatively, if you want to pay for a life insurance policy for your elderly parents, they will need to be directly involved in the process. They will need to apply for the policy and be the official policyholders, but then they can designate you as the beneficiary and you can take over their monthly premiums.
Should I buy life insurance for my parents?
You may be hesitant to consider buying life insurance for your parents because contemplating their death can be upsetting and taking out new insurance policies for seniors can seem like a daunting task.
It can be difficult to work with an insurer without the presence of your parents, and depending on your parents’ health, you may struggle to bring them along and explain the details. However, there are several possible reasons that you may need to buy life insurance for your parents.
If you depend on your parents in any financial capacity, you may want to consider helping them purchase a life insurance policy that offers a large enough death benefit to offset the loss of their support after they die. Your parents may also need life insurance to cover expenses that they have not planned for in the event of their deaths. Some of the most common reasons for buying life insurance for parents are listed below:
- You depend on your parents for financial support.
- Your parents provide you with a service such as childcare that you would struggle to afford on your own.
- You will become financially responsible for a surviving parent if one of them dies.
- Your parents have debts that will need to be paid after they die.
- Your parents have medical bills or hospice care costs that will need to be paid.
- Your parents do not have savings to accommodate end of life expenses.
What type of life insurance should you get for your parents?
If you can assist them with the application process, there are several types of life insurance that may support your parents’ needs and provide you with adequate support after they pass away.
Whole life insurance is a type of permanent insurance with a guaranteed death benefit. These policies last as long as the policyholder lives and many have cash value, but they are considerably more expensive than term life insurance policies. Your parents will need to be the policyholders for this type of life insurance, but you can pay the premiums and be the designated beneficiary. With older parents, rates may be higher and depending on their health, qualifying may also be tricky.
Although your parents will likely need to take out their own policies for whole life and term insurance, you can generally purchase final expense insurance on behalf of your parents. Final expense insurance is also a form of permanent life insurance that will last as long as your parents live, but these smaller policies usually only need your parents’ consent for you to open the policy on their behalf.
Term life insurance
Unlike whole life and final expense insurance, term life insurance is not permanent. Term life insurance lasts for a predetermined amount of time — generally 10-30 years — and it is considerably more affordable than most other types of life insurance (depending on age and health).
If your parent dies within the set term, then you (as the beneficiary) will receive their death benefit. Like whole life insurance, your parents will need to be the policyholders for term life policies, but you can help them apply and take on the burden of monthly premiums.
How to get life insurance for your parents
Step 1: Communicate
Since your parents will need to either be physically present to buy term/whole life insurance or provide their consent to buy final expense insurance, you first need to get your parents on board. Be sure to communicate the reasons for the insurance and tell them what expenses you plan to cover with their death benefit. Also, if you plan to pay their premiums, be sure to let them know.
Step 2: Get quotes
Many insurers have online tools that will give you quotes before without even having to leave the house. Once you have decided whether to purchase term, whole or final expense insurance, be sure to shop around before deciding on a specific insurer to get the best rate.
Step 3: Designate beneficiaries
If you are helping your parents purchase the life insurance policies and you are paying the premiums, make sure you are designated as the beneficiary. Also, to avoid the death benefit being taxed, you should help your parents limit the number of names on the policy. Your parents should be listed as both the policyholder and the named insured, while you are listed as the beneficiary.
Step 4: Determine premium payments
Once you have worked with your parents and their insurer to purchase a policy, you will need to determine who will pay the premiums. Whether you or your parents cover payments, it’s important that those aren’t missed or you will lose the coverage and not receive the death benefit.
Tax implications of buying life insurance for your parents
If you have limited the number of people listed on the insurance policy, then your parent’s death benefit shouldn’t be taxed, but there are some circumstances when it might be.
If your parents are very wealthy and have an estate that exceeds $11.4 million (the current IRS limit) or if the death benefit payout is considered an asset, then the payout will be subject to an inheritance tax. Likewise if the death benefit is considered a gift, meaning that you are not financially depending on it, then it will be subject to the gift tax. Also, if the benefit comes from your grandparents to you, or from your parents to your children, then it will be subject to inheritance tax.
Alternatives to buying life insurance for your parents
There are times when paying for a life insurance policy for your parents is not the best option for your situation. In this event, there are a few alternative options that can be helpful:
- Work with your parents to develop a savings plan, or set one up on their behalf.
- Encourage you parents to purchase their own policy with a low monthly premium.
- Discuss their final wishes and prepay for funeral costs at the location of their choice.
- Your parents will need to be involved in the insurance buying process.
- Life insurance for parents can provide a death benefit that will offset the financial implications of their loss.
- There are several types of plans to meet a variety of senior needs.
If you depend on your parents in any financial sense, you may need to help them purchase a life insurance policy. You can guide your parents through the acquisition process and help them cover monthly premiums, but you cannot take out a plan for them without their knowledge. Take the time to discuss options for life insurance for parents or alternative measures to provide financially in the event of their passing.