Should You Buy Life Insurance For Your Parents?

It is possible to buy life insurance for your parents, or for someone else, but you must have their consent and show proof of “insurable interest” (that their death would have a financial impact on you). In most cases, having your parents buy their own policy would be the best option for covering their final expenses.

Having the conversation about life insurance for your parents opens a dialogue about other important considerations related to seniors such as long term care, wills, executors, and overall finances.
Life insurance is an integral part of life planning and the life insurance conversation helps families take an honest look at their true needs and the detailed numbers on everything from retirement savings to health care to final expenses.

Consent

universal life insurance older coupleWhether buying life insurance for your parents or for anyone else, you’ll need the consent of the insured.
Purchasing life insurance for your parents can be done in one of two ways.
Your parents can buy their own life insurance policy. If your parents purchase their own life insurance policy, there is no need for them to prove insurable interest because they are the owners of the policy as well as the insured. If they choose to name you as a beneficiary, which is the person to whom the death benefit will be paid, the payout can be used for final expenses or any other remaining expenses or debt.
Alternatively, you can buy a life insurance policy for your parents, but only if your can prove insurable interest and only with their consent. Like many other activities we all experienced while growing up, you’ll need your parents’ permission to buy a life insurance policy for your parents. In this case, you are the owner of the the policy and responsible to make premium payments.

Insurable Interest

To buy life insurance for someone else, you need to have an insurable interest. The term insurable interest in this context just means if your want to buy life insurance for your parents, you have to demonstrate that the death of your parent or parents would cause a financial loss for you. The insurable interest requirement isn’t unique to life insurance. For example, you also can’t insure your neighbor’s house. You wouldn’t suffer a financial loss if your neighbor’s house was damaged.
It often isn’t difficult to prove you have an insurable interest if your parents pass but the amount of documentation needed will increase as the requested policy coverage amount increases. A smaller policy with up to a $50,000 death benefit will require less proof of insurable interest than a policy with a death benefit of $250,000. A smaller policy generally considers final expenses, such as funerals and burial costs, which can often exceed $10,000. Policies with higher coverage amounts may be considering sizable outstanding debt as well, such as a mortgage on a home or other debt which could affect an inheritance or possibly turn an inheritance into a sudden burden.
As a part of insurable interest, the amount of the death benefit must closely match the the amount of the financial loss you would suffer if your parents passed. If your potential loss is only $25,000, you may not be able to purchase a larger policy of, for example, $250,000.

How Much Would Life Insurance Cost?

Rates listed below are for a 64 year old man in California in good health and who never smoked.

No Exam Term LifeInstant IssueFinal ExpenseGuaranteed Issue
Lowest Price Company
Amount Of Coverage$50,000$50,000$50,000$40,000
Policy Type10 Year Term Life Insurance10 Year Term Life InsuranceLevel Whole LifeGuaranteed Issue Whole Life
Medical Exam?No Medical ExamNo Medical ExamNo Medical ExamNo Medical Exam
How Long For Approval?Up To 2 weeksUsually Same DayUp To 2 weeksUsually Same Day
Premium Quoted$63.91 per month$78.17 per month$275.74 per month$342.92 per month

Reasons to Buy Life Insurance for Your Parents

Life insurance and cancer older couple embracing each otherThere may be any of a number reasons to buy life insurance for your parents. Think carefully about the goals of the life insurance policy you’re considering. Your objectives with the policy can help determine appropriate coverage amounts and help you to choose a policy type that best meets your objectives.
If your goal is to have the policy pay for final expenses, a policy with a death benefit between $10,000 and $50,000 may meet your needs. Bear in mind that final expenses may include some medical expenses and that funeral and burial costs have a tendency to outgrow budgets and cost expectations. Among common medical costs are hospice and hospital bills that were not covered by Medicare. It’s wise to plan for at least some leftover bills when setting goals for a life insurance policy for your parents.
If your goal with the life insurance policy goes beyond final expenses, another type of life insurance policy may better meet your needs. For instance, if your parents own a house which they intend to leave to you but the home still has a sizable mortgage, a life insurance policy with a higher death benefit may help to pay for final expenses as well as paying some or all of the remaining mortgage balance on your parent’s home. You may not know with certainty that you’ll have the extra money to take on a mortgage, or a second mortgage if you already have a mortgage for your own home. Without a life insurance policy or a mortgage life insurance policy for your parents, there is a risk that the home they leave to you as in inheritance can be lost or forced into a sale during an already difficult time.

Choosing a Coverage Amount

Once you’ve established your goals for the life insurance policy for your parents, it’s time to do the math and start estimating how much you will need the policy to provide as a death benefit.
Every family’s situation will be different, but common to all will be final expenses. Funerals, and burials can easily top $10,000 per person. It’s better to budget higher than this, if at all possible, because lingering medical bills or hospice bills can cause final expenses to grow significantly. If a higher coverage amount doesn’t fit your budget, policies with a death benefit as low as $10,000 can be purchased. A policy with a lower death benefit can offer more affordable monthly premiums, but may leave you with considerable expenses after the proceeds from the death benefit have been used.
If your goal for the life insurance policy is to protect an inheritance, maybe a home that your parents are leaving to you, you’ll need to look at larger death benefit options, which may reduce the types of policies that will meet your needs.
It becomes important to look a the big picture including the amount of money your parents have in savings, other income, and outstanding debt. If your parents have significant savings and only a short amount of time remaining on their mortgage, you may not need as much for a death benefit. However, if your parents just did a cash-out refinance on their home and have no meaningful savings, you might want to look closely at those numbers. When parents pass before the mortgage is paid off, their heirs could inherit a sizeable mortgage payment.

Which Life Insurance Policy Is The Best For Aging Parents?

life insurance quotes

Choosing the Best Type of Life Insurance Policy for Your Parents

Having a policy is often better than having none at all, but not every life insurance policy will meet your needs as well as others and some types of policies might not fit well for your individual situation.

Common Types of Life Insurance:

Term Life Insurance

final_expenseTerm life insurance is life insurance with a time limit. It isn’t designed to last forever. Most often, term life insurance is purchased to cover a large debt, such as a mortgage or another financial obligation. Depending on the age of your parents, term life may not be the best choice. Term life insurance has a set time frame, a term, which may be 10 years to 30 years. This type of policy is often purchased to cover a financial responsibility that has an end date, like a mortgage or providing for children.
Because a term life policy is only in force for a specific amount of time it is less expensive than some other life insurance types. However, term life insurance has some limitations when buying life insurance for your parents. The available term options, meaning how long the policy will be in force with guaranteed premiums, will often be for a shorter amount of time if the insured person is older. Someone who is 65 years old may find that some life insurance companies will only offer a 10 year term policy.
If one of your primary reasons to buy life insurance for your parents is to cover their mortgage and the time remaining on their mortgage is within the available term options, ask an agent if a term policy is a good fit for your needs. An agent can explain the details as they relate to your individual situation.

Whole Life Insurance

Whole life insurance is designed to be a life insurance solution that lasts for, as its name suggests, the entire life of the insured. Where a term policy has a fixed time period for guaranteed premiums, a standard whole life insurance policy offers fixed premiums for the entire life of the insured. Premiums for whole life insurance policies are more expensive for the same amount of coverage when compared to a term life policy because a term life policy might not ever pay a death benefit but a whole life insurance policy always pays a death benefit for qualified claims.

Final Expense Insurance

final expense life insurance policy is a type of whole life policy that is designed to pay for final expenses. Its focus on this one goal creates some unique characteristics. A final expense policy is often only available for people over the age of 50. Many companies offer policies for customers up to 80 years of age, and sometimes even slightly older. Expect rates to be higher as the age of the applicant increases.
Often, a final expense policy will have a simplified application and may not require a medical exam, so the main driver for rates is the age of applicant. Even if a medical exam is not required, applicants will need to answer some questions about their health and insurance companies may check information available from the Medical Insurance Bureau (MIB).
Death benefit options for final expense policies are usually on the lower end because this simplified policy type is intended for final expenses.

Universal Life Insurance

Universal Life Insurance and its variations add an investment element to the life insurance policy and add some flexibility to the policy premiums if the cash value from investments is sufficient. As with many investments or investment-based products, time is an important element for returns. If your parents are older, ask an agent if a universal life insurance policy will meet your goals or if another type of life insurance policy would be a better fit.

Rating Factors for Life Insurance Policies

The age of your parents will be a large factor in determining rates. Health, family history, hobbies, and other factors may be considered. Rating factors and how heavily each is weighed may also vary by company. Some insurance policy types may require a medical exam.
Some Common Life Insurance Rating Factors:
These and other rating factors are used by insurers to determine the risk of death and to set premiums based on that risk. For many policy types, insurers will assign a rating class which groups people by health status, family history, and other factors.
A final expense life insurance policy simplifies the process of the application and may not require a medical exam. However, without an exam, which helps insurers to understand the risk and to set an appropriate premiums, rates may be higher with a final expense policy (or any other no-exam policy).
The amount of the death benefit will also drive rates, but not usually on linear basis. A policy with a $50,000 death benefit usually doesn’t cost twice as much as the same policy with a $25,000 death benefit.

Sooner is Often Better for Rates

Life insurance rates are based on many factors, but the primary driver for the premiums is based on the probability that the insured will die while the policy is in force. Along with health factors, age is among the largest factor in determining life insurance rates. People can die from a lot of different causes but if none of the other causes gets us, age always will. We aren’t built to last forever.
Return of Premium Term Life insurance savingsA life insurance policy purchased earlier in life will generally be much less expensive than a policy purchased in the later years of life. There’s less risk of death when we are younger. The risk of age also carries over to policy types. As we get older, or as your parents get older, you’ll find your options for policy types will begin to dwindle with many insurers. For example, term life insurance may not be available after a certain age with some insurers. Even at earlier ages, you may find the available term choices to be limited to shorter terms.

Key Takeaways

Buying life insurance for your parents (or anyone else) requires their consent and evidence of insurable interest equal to the amount of the death benefit.
There are two ways to buy life insurance for your parents. If your parents purchase the policy, they do not need to prove insurable interest because they will be the owners of the policy and the insured. If you purchase the life insurance policy for your parents, you will be the owner of the policy and responsible for payments. In this case, you will need the consent of the insured and demonstrable insurable interest.
Choosing the right type of life insurance policy for your parents and choosing a death benefit amount that will meet your needs requires taking an honest look at the goals of the policy. In some cases, it’s best to have a thorough conversation with your parents regarding their long term care, overall finances, outstanding debt, and other considerations.
Life insurance is part of an overall life plan. An agent can guide you through the process and explain your options so you can rest easy – knowing you and your parents are well-covered.

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