The loss of a parent can be emotionally devastating and an unpleasant topic to consider. But it’s important to acknowledge any potential financial impacts that might result. For example, if your parents provide financial support, or if you are responsible for debts your parents currently pay, their death may leave you in a difficult position. Alternatively, you might just want sufficient funds to pay for a meaningful memorial that celebrates your parents’ lives.
Can You Buy Life Insurance for Your Parents?
You can buy life insurance on a parent’s behalf, and you can even make yourself the beneficiary. However, you need to satisfy certain requirements to do so. To buy life insurance on somebody else, you need to have an insurable interest. Put another way, there must be a negative financial, or in some cases emotional, impact on you resulting from the insured person’s death. Often, family members (including parents) automatically meet the criteria. A few terms may help solidify the concepts of buying life insurance for your parents. For example, when buying coverage, you might be the policy owner and your parent might be the named insured.
Policy owner: The policy owner applies for and controls the policy and is usually responsible for premiums. Unless there are any restrictions, the policy owner can change the beneficiary, cancel the policy, and take other actions.Named insured: The named insured is the person whose life is linked to the insurance policy. The death of the named insured triggers a policy payout.
Why Should You Buy Life Insurance for Your Parents?
There are a number of valid reasons to purchase life insurance for a parent. Some benefits to life insurance can even kick in prior to the insured person’s death.
Pay Off Debts
If the death of a parent will lead to financial hardship, it can make sense to buy life insurance for them. For example, you might want to protect yourself and your immediate family if you cosigned a loan to help a parent borrow money. Alternatively, you (and any siblings) may want to keep a family home with outstanding mortgage debt—but don’t have the funds to pay off the mortgage. In cases like these, life insurance can eliminate debts and make the loss just a little more bearable.
Provide for Family Members
If you have siblings or other family members that your parents support, you can buy life insurance that provides funds for those individuals. In particular, those with special needs may need additional financial support, and life insurance can provide those funds.
Cover Final Expenses
You can also buy a life insurance policy to help with final expenses after a parent’s death, including the memorial, funeral costs, travel costs for attendees, and related expenses.
Provide Care During Life
Life insurance can provide funds while your parents are still alive. If your policy includes an accelerated death benefit (ADB), you may be able to access a portion of the death benefit before a parent dies. That could be particularly helpful if a parent faces high medical bills or needs long-term care. However, the beneficiaries would receive less money in this case because you take an advance against the policy’s death benefit when exercising an ADB.
Tips for Buying a Life Insurance Policy for Your Parents
If you decide to buy insurance for your parents, the steps below can help you cover some of the most important bases.
Review Your Coverage Options
There are several different types of insurance available, and the right choice depends on your needs. You can break the choices down into two broad categories: term insurance and permanent insurance. Term insurance provides coverage for a limited time (known as the term), which might last from one year to 30 years. Coverage ends after the term—or whenever you stop paying premiums. Permanent insurance remains in force for as long as premiums are paid, regardless of how long your parents live. Permanent insurance also includes a cash value that may be available for unexpected expenses (and to pay premiums). Term insurance is more affordable, but has an expiration date. If you’d like to account for unexpected longevity, a permanent life insurance policy can make more sense. You may also be able to use life insurance to pay for costs before death. Some policies include an ADB rider that allows you to take an advance against the death benefit. To qualify, the insured must be diagnosed with a terminal illness (after the policy is issued) that is expected to lead to death within a short period. The funds can help pay for end-of-life care and other expenses, but using an ADB reduces the death benefit that beneficiaries eventually receive. ADB riders are available on both term and permanent policies. For inexpensive insurance to pay for modest expenses like a funeral, consider final expense insurance. These policies have relatively small death benefits, but the funds may be sufficient to cover burial or cremation expenses and related costs. Getting approved may be easy because there’s often no medical exam, and you might not need to answer any health-related questions. However, policy costs tend to be higher for the amount of death benefit purchased relative to a policy that requires medical questions and a medical exam.
Decide How Much You Need
Choosing the right death benefit can be a challenge. A bigger death benefit is always better—but you pay higher costs to secure it. Decide what the death benefit needs to pay for, and then verify that you can afford that amount of coverage. For example, you might buy insurance to provide for a sibling with special needs. To arrive at an appropriate amount, estimate the lump sum amount that will provide the resources your sibling needs for the rest of their life. A financial planner or insurance agent can help you complete those calculations.
Determine Who Will Own the Policy
The owner of a life insurance policy has the right to change beneficiaries, cancel a policy, and make other changes. The owner is also responsible for payments. Because of that, it’s crucial to name the right person. If you’re buying insurance for your parents to protect yourself, it may be wise to make yourself the policy owner. However, if you’d like your parents (or anybody else) to have control over the policy, you can certainly name a different owner.
Check the Tax Implications
Discuss your strategy with a CPA to understand any taxes that may result from your insurance policy. In most cases, a death benefit paid to beneficiaries is tax-free. However, it is possible to run into tax problems with life insurance. For example, if you transfer the policy to somebody else or pay an excessive amount into a permanent policy, there may be tax implications.
Plan the Right Time
Life insurance rates are typically based on the age and health status of the insured. As a result, it’s usually best to buy life insurance as soon as you know you need it. As your parents age, the costs of insurance will rise, and they may discover new health issues over time. If you buy while they’re relatively healthy, you may be able to lock in lower costs.
Make Sure It Makes Sense
If there’s no financial benefit to having coverage for your parents, it may not make sense to buy insurance. Buying a policy that pays out within a few years is often financially advantageous, but you can’t predict the future. If you’re unable to pay premiums long enough for the policy to pay out, you could end up wasting money.
Alternatives To Buying Life Insurance for Your Parents
Life insurance won’t be an option in some cases or it might not be the perfect solution. But there may be other ways to meet your needs.
Your Parents Buy Their Own Policies
It may make sense for your parents to buy life insurance themselves. If your parents are financially secure and comfortable navigating the process, this could be the most straightforward approach.
Long-Term Care Insurance
If your primary concern is the cost of long-term care, consider a long-term-care policy instead of life insurance. These policies provide funding to cover in-home help, nursing homes, and other expenses for your parents. To qualify for benefits, the insured person needs to lose the ability to perform certain functions, or activities of daily living, or be diagnosed with specific conditions.
Save Money for the Future
If you can predict how much money you’ll need, it may be possible to set money aside in a savings account for end-of-life needs. Depending on your family situation, that might be an account you fund on your own or in addition to contributions from other family members..
The Bottom Line
Life insurance can provide essential funds after a parent dies. The money can pay for burial expenses or provide support for loved ones and, in some cases, you may need to take the lead on buying insurance. When that’s the case, your parents will need to participate to a limited degree, but you can buy and control a policy on a parent’s life as long as they give their consent.
