There are many reasons you might be considering taking out a life insurance policy on your parents. Perhaps they can’t afford to take out a policy themselves and also don’t have money set aside for funeral costs. Or maybe they form an essential part of your economic stability and you will face serious difficulties if they are to pass.
Whatever your reason, taking out a life insurance policy on your parents can be a more challenging process than doing so for yourself. You need to be wary of tax implications and may find it difficult to find good policies because of their more advanced age.
But if you are looking at getting a life insurance policy on a parent, here is everything you need to know.
Why Take Out Life Insurance On A Parent?
There are many reasons why you might want to purchase a life insurance policy on your aging parents, naming yourself or your children as beneficiaries. Among the most common reasons are:
- To receive a large benefit payout upon their death, which could be used for expenses such as putting children through college
- They have cosigned a loan or other debt with you, in which case their death may automatically trigger a default, so a life insurance payout can cover that debt
- Your parents are your main source of childcare and you will need resources to make other arrangements in the event of their deaths
- Your parents haven’t put aside money for end-of-life expenses such as a funeral and you are concerned about being able to cover these costs
There are a variety of other reasons why you might want to take out life insurance on a parent. Everyone’s situation is a little bit different.
How To Take Out Life Insurance On A Parent
By far the easiest way to take out life insurance on a parent is to get them to take out the policy and name you as their beneficiary. This is because it can actually be very difficult to take out life insurance on someone other than yourself.
The vast majority of life insurance policies have the policyholder and the named insured (the person who the policy covers) as the same person.
In order to take out life insurance on someone else, you need their consent, and you have to prove that you have “insurable interest.” This basically means that you need to prove you will suffer financially if that person dies.
You may be familiar with examples of this from Hollywood, where studios will insure their big-name actors, as they stand to lose significantly if an actor dies before the end of filming.
For an adult child to prove insurable interest on a parent is actually very difficult and almost never approved by an insurer.
For this reason, the best course of action is to help your parents take out a policy and name you as beneficiary. You can still pay the premiums on their behalf.
Moreover, in addition to finding a policy that covers what you think you’ll need, you can help your parents identify what other costs they might want to cover when they are gone.
Choosing A Policy
When it comes to actually taking out the policy, you need to choose a policy that will meet both your and your parents’ financial needs.
Term vs Whole Life Insurance
The first decision you will need to make is to choose between a term and a whole life insurance policy.
A whole life insurance policy is the one that most of us are familiar with. You pay into the policy for your whole life, and no matter when you die, the policy pays out to your beneficiaries.
Term policies are fixed term life insurance policies set for 10, 15, 20, or 30 years. If the named insured dies during the term of the policy, it pays out. But if they outlive the policy, it has no value and never pays out.
However, term policies are significantly cheaper than whole life insurance policies. For example, a 30-year-old woman looking for $500,000 in coverage will pay roughly $3,000 per year for a whole life insurance policy and only $300 per year for a term policy.
Insurance companies can offer these cheaper rates for term policies because they will not pay out on the majority of term policies they underwrite.
For this reason, term policies are taken out as cheaper policies to cover times of risk, such as the period of a mortgage or other large debt.
You can read more about the difference between whole and term life insurance policies here.
It is not uncommon to have more than one life insurance policy. It is not unusual to have a whole life insurance policy to cover things such as funeral costs and estate tax, and a cheaper term life insurance policy to cover a mortgage or significant loan for a defined period of risk
You may want to consider this kind of arrangement with your parents. You can invest in a low-value whole life insurance policy to cover end-of-life expenses and inheritance tax. You can then couple this with a high-value term life insurance policy to cover the period of time when you need their support to care for children.
The exact balance of policies and the amount for which you seek insurance will depend on your individual needs.
There are a few other things to consider in order to ensure that you get the best value out of a life insurance policy for your parents.
Avoid Unexpected Tax Consequences
In order to ensure that there are no unexpected tax consequences to the death benefit that pays out on your parent’s life insurance policy, you need to choose the correct beneficiary.
There are three people involved in the contract: the person whose life is insured, the person who owns the policy and pays the premiums, and the beneficiary of the policy.
Two of these people need to be the same person or else the death benefit can be considered a taxable gift and the owner of the policy may need to pay associated taxes.
This shouldn’t be a problem if you assist your parent in taking out the policy in their name as the owner, even if you pay the premiums.
Consider The Health Of Your Parents
The two most important factors influencing the amount of the premiums you will need to pay is the age of your parents and their health histories.
If your parents are elderly, for example over 80, you may find it very difficult to find an insurance policy that is affordable and meets their needs. Many insurers won’t insure over-80s because of the risk of paying out before they have recouped costs through premiums. Sometimes policies for over-80s also carry riders, such as no payout if the insured individual dies within the first two years of the policy.
If your parents suffer from a serious medical condition, such as Type 2 diabetes, you might find yourself in the same position, as they are likely to have very high premiums due to health considerations.
If your parents are elderly or unwell, you may need to reconsider your decision to insure them, as the amount you will need to pay out monthly may not be worth the return on investment.
Cost Of A Life Insurance Policy For Your Parents
To find the best rates, you will need to shop around. Different life insurance providers weigh different elements differently, so you will find that premiums vary.
But when you are getting life insurance quotes for your parents, this is a general guide to what you can expect.
For a policy worth $100,000 for a man aged 65, you can expect to pay $90 per month for a 10-year term policy and $414 per month for a whole life policy. As women have longer life expectancies, this will be a bit cheaper at $66 per month for a 10-year term policy and $350 for a whole life policy.
If your parents are older, aged 75, you should expect to pay $265 per month for a 10-year term policy and $710 per month for a whole life policy for a man. For a woman, it is $200 for a term policy and $700 for a whole life policy.
If your parents are even older, aged 85, expect to pay twice that.
There are a lot of good reasons why you might want to take out life insurance for your parents. It can help you cover the cost of their end-of-life expenses, such as a funeral, and it can protect you if they are an integral part of your livelihood, perhaps providing child care or being a cosigner on a loan.
Whatever you do, you will need to do it in cooperation with your parents, as they need to authorize the policy. It is then a matter of choosing a policy that balances the needs of both you and your parents, and which is a sensible return on investment for the premiums you will pay.