Is it true that parents no longer need life insurance after a certain age because their children are self-sufficient? For many families, the answer is no. Too often, aging parents end up needing help from their adult children because their own finances aren’t in the greatest shape.
In fact, 18 percent of Americans with household incomes of $75,000 or more know that their parents are counting on them to become caregivers, according to MassMutual’s 2018 State of the American Family study.
Adult children facing this situation may be wondering about taking out life insurance for a parent so that passing down money problems won’t be their parent’s legacy. That means understanding:
- Why adult children might buy life insurance for their parents.
- Requirements for buying life insurance for a parent.
- Deciding which type of life insurance is best.
- When to buy life insurance for a parent.
- Tax considerations for the parent and the child.
Why adult children might buy life insurance for their parents
When you were born, your parents may have purchased life insurance to provide for you in case something happened to them. You may not have known about it, but while you were growing up, there may have been a term policy in place to provide for you until you could support yourself. Many parents engage in this type of family financial planning.
Term policies can offer protection for a relatively low premium. But they’re designed to expire once the risk they’re protecting against — such as dying when one’s children depend on one’s income — has run its course. As a result, unless they own a permanent policy, some people’s aging parents no longer carry life insurance.
But with general gains in longevity, more parents are coming to depend on their children. That means new types of risk can emerge for self-sufficient adult children when parents are in their 60s and older. And these situations may carry financial consequences. These can include the following:
- A child may need to take time away from work to care for a sick parent, resulting in a significant loss of income or savings.
- A child may need to stop working to provide long-term care that neither the parent nor the child can afford, especially if local facilities that accept Medicare or Medicaid are not well regarded.
- When one parent dies, a child may need to help the surviving parent move into a senior living facility where they can get emotional and physical support. But moving costs and facility costs can be expensive and may be beyond the parent’s means, and the child may want to pick up the tab.
- A parent may carry mortgage debt that would force the home’s sale upon their death, preventing a child from inheriting the property. The same might be true of other real estate, such as a family farm or a vacation home.
- A child may have cosigned a parent’s mortgage or other loan and may not want to be responsible for the balance if the parent dies before repaying the loan.
- A parent may have specific end-of-life wishes but not have the money for their child to execute them — and not want to burden their child with the cost.
Life insurance proceeds could help recoup lost savings and income or make up for the costs involved in these and other types of situations. (Related: Retirement: How to preserve it while helping your parents)
Requirements for buying life insurance for a parent
You might already have decided that buying life insurance for your parents would make good financial sense. But before you can take out a policy, you’ll have to get them on board. (Learn more: 9 financial questions to ask your mom)
The first step is to broach four, possibly uncomfortable, topics:
- The substantial expenses your parents might incur in their final years.
- How their decline might affect their assets and your income or savings.
- The liabilities that might reduce the value of their estate.
- Any wishes they have to leave an inheritance to their children and grandchildren.
As part of this conversation, you may be able to find out if they already have life insurance. If so, it would be helpful to know what type it is, how much it is for, and who the beneficiary is so you can determine if this existing policy will accomplish your goals.
If a policy isn’t already in place or if it’s inadequate, and if you and your parents agree that it would make sense for them to carry life insurance, the next step is to convince them to let you pay for it. The owner and the insured do not have to be the same person, though they often are. You’re probably both the owner and the insured on your own life insurance policy.
But in the situation you’re trying to prepare for, it may be advantageous if the adult child owns the policy so they can make sure the premiums get paid and maintain control over who the beneficiary is. Even if your parents already have a policy, if they are the owners, they control the beneficiary, which means you can’t be certain that it will be you when the time comes. (Related: Real cases of senior financial exploitation)
You can’t take out an insurance policy on your parents without their knowledge and consent. So, you’ll have to convince your parents to actually apply. You can fill out the paperwork for them if they’re willing to tell you their medical history, current health issues, and current medications. If not, you can still get them started by giving them the paperwork and a timeline for submitting it. They will still have to sign the application and they may have to undergo a brief exam. The medical information and exam results are kept confidential.
To complete the application, the insurance company will typically send a medical professional to the applicant’s home to check vitals, ask questions, and collect urine and blood. You can be there with your parents during this process if that would make them more comfortable.
Besides consent, the other big requirement is insurable interest. Whenever the insured and the policyowner are not the same person, the policyowner must be able to prove that they will suffer a financial loss when the insured dies. Further, the policy amount must be similar to the amount of that loss.
So, for example, if your parent owes $150,000 on their mortgage and you want to take out a $170,000 policy to cover the mortgage debt and funeral expenses, then your insurable interest should be easy to prove. But you’d be hard pressed to secure a $5 million policy on your parent in this situation.
Deciding which type of life insurance is best for a parent
No matter what age your parent is, the type of life insurance policy that covers them should align with the risk being covered. With that in mind, you might purchase a term policy to cover a debt, a permanent policy to cover estate taxes, and a final expense policy to cover a funeral. You don’t have to purchase all three (though you could). The goal is to purchase the type of policy that best matches your family’s circumstances. Here’s a brief overview of how each major type of life insurance for seniors works.
- Term life insurance: As we mentioned earlier, term policies tend to offer coverage for the least amount of money. But what makes them so affordable is that the coverage terms expire after a certain number of years, often 10, 20, or 30 years. Term coverage may not be available past age 85, even if the policy is taken out at a younger age. That may be fine if the risk you’re insuring against goes away before the term is up. But for more enduring risks, you may want to choose a whole life policy.
- Whole life insurance: This type of permanent insurance costs more than term but is in effect for the life of the insured, as long as premiums are paid. It’s a useful tool for wealthy families: They can use the policy proceeds to pay estate taxes so the entire value of their estate goes to their heirs. It’s also a logical choice for anyone who wants to provide a guaranteed death benefit for a child — as reimbursement for providing care, for example.
- Final expense life insurance: Sometimes colloquially referred to as burial insurance or funeral insurance, this is a permanent policy with a small face value, typically $2,000 to $25,000. Its small benefit means the premiums are substantially lower than those for a larger whole life policy. The applicant must answer a few medical questions and provide their prescription history, but need not undergo a medical exam, depending on the carrier. (Related: Options for insurance in your later years )
- Guaranteed issue life insurance: People who don’t qualify for any other policy because of their health may purchase guaranteed issue (sometimes called guaranteed acceptance) at a higher cost. Examples of conditions that typically disqualify applicants are terminal illness, dialysis, currently being in a hospital or nursing home, and needing an organ transplant. These policies have much higher premiums than ones with health qualifications because they accept the highest-risk applicants. They also have a two-year waiting period. If the insured dies during the waiting period, the insurer typically will return the premiums to the policyowner.
As touched on earlier, the amount of coverage you buy when taking out life insurance for a parent should align with your insurable interest and the risk being insured against. This life insurance calculator can help you determine how much that is.
“The policy duration and face amount should always match the obligation, both now and in the future when the policy would be needed most,” said insurance industry veteran Jason Fisher, founder and CEO of BestLifeRates.org. “It could range from a small final expense policy all the way up to a multimillion dollar estate planning policy.”
Some families may not be able to afford the premiums on their ideal amount of coverage. But having some coverage is better than none. Also, working with a financial professional can help families find the best policy for their needs, whatever size and type of policy they’re searching for.
When to buy life insurance for your parents
We often get the advice to wait when we’re considering an important purchase. “Don’t make any rash decisions.” “Wait and see if the price goes down.” “Shop around for the best deal.” This is all good advice for most purchases, but life insurance is different.
“The best time to buy life insurance for your parents is the moment you know you need it,” said Anthony Martin, CEO of independent life insurance brokerage Choice Mutual. “Life insurance rates are determined by age, gender, and health. Health is the biggest factor that determines what types of policies they can qualify for and how much it will cost.”
By waiting, you risk having your parents develop a health issue that makes life insurance more expensive or makes them uninsurable, he explained. (Related: Shopping for life insurance)
Also, the maximum age at which your parent can become insured will also vary by carrier and by policy. Fisher said most carriers will issue a policy to someone who is 85, and some will go over.
Another reason not to wait on buying life insurance for a parent is that mental decline could disqualify them.
“Unfortunately, almost all life insurance companies will refuse to extend coverage to [someone] with dementia or Alzheimer’s disease, with the exception of certain limited benefit guaranteed issue policies,” said Joel Ohman, a Certified Financial Planner™ professional and the founder of InsuranceProviders.com.
Tax considerations when purchasing life insurance for a parent
Life insurance benefits are usually not taxable to the beneficiary (or the owner or insured's estate), which is one of the reasons it’s such a valuable product. But you should be aware of the potential tax consequences before taking out the policy.
Of the insured, the policyowner, and the beneficiary, the same person should be any two of these to structure the policy in the most tax-efficient way, Ohman said.
“For example, if you take out a policy on your parents, then you should be both owner and beneficiary,” he explained. If all three people are different, gift taxes could come into play. You may want to consult a financial professional or qualified tax advisor about your personal situation.
“Even as an adult, if the death of a parent would put you in a worse-off position financially, then you may want to convince your parents to buy life insurance, or even buy a policy for them,” Ohman said.
The grieving process after losing a parent is difficult enough. Life insurance can simplify the financial side of things so you can focus on the emotional and logistical ones.
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