There are many reasons why you might want to buy a life insurance policy for your parents. Perhaps you will need to replace their income once they are gone, or you rely on them financially. It may also be that you want a financial safety net to pay off their debts, end-of-life medical bills or final expenses.
Whatever your reason may be, providing financial help for your parents up to and after their death can be a challenge, and life insurance is one way to potentially recoup some of the money you’ve spent on their care or to help pay for final arrangements like a funeral. Some policies allow you to use the benefits before their death under certain circumstances.
If your parents have debts or medical bills, a life insurance payout can help settle those obligations, easing the financial strain on the family. It can also serve as a financial gift or inheritance for grandchildren. Overall, it offers peace of mind and ensures that financial responsibilities will be managed.
You’ll need to work with your parents to find the right coverage for their situation.
Buying life insurance for your parents
You can buy life insurance for your parents, but you can’t do it behind their backs. They must give you permission to purchase life insurance for them and they’ll go through the normal life insurance buying process, which may include a medical exam. And they’ll have to sign the life insurance application.
To be a life insurance beneficiary on a policy you buy for your parents, you need to prove that you would suffer financially if they died. For instance, you receive financial support from them or they have a mortgage or other debts you would have to pay after they pass away.
This means you have an “insurable interest” in getting them life insurance. Children generally have an insurable interest in their parents, so it shouldn’t be a deal breaker.
What type of policy is best?
When you and your parents realize they need life insurance, it’s smart to move quickly to find the right type of life insurance. The younger and healthier your parents are when applying for coverage, the cheaper their rates are likely to be. And most companies won’t issue policies to people who’ve developed dementia or Alzheimer’s.
To simply cover funeral arrangements, consider burial insurance, a life insurance policy with a small death benefit that beneficiaries can use as needed. You can also buy funeral insurance, which sends payment directly to a funeral home for prearranged services.
Term life insurance can be a good choice if your parents need coverage only for specific years, such as the duration of a mortgage. Keep in mind that if a term life policy expires before your parent dies, no one receives a death benefit.
Permanent life insurance typically doesn’t expire. It also builds cash value over time, which may be helpful if you need to pull money out of the policy before your parents die to help cover bills. But premiums are typically much higher than for a term life plan. Plus, that cash value needs many years to accrue, so if you haven’t had the policy for long, the life insurance cash value is negligible.
Planning for long-term care
Buying life insurance for your parents is also an opportunity to think about long-term care benefits. Long-term care can be expensive: Median costs in 2021 were $4,500 a month for an assisted living facility and $7,908 a month for a semi-private nursing home room, according to Genworth’s 2021 Cost of Care survey.
If you’re interested in combining the benefits of life insurance with long-term care coverage, you have several options.
A long-term care rider added to a life insurance policy will pay a benefit if the insured person is unable to perform a certain number of activities of daily living such as eating, toileting, transferring, bathing, dressing and continence.
Riders can work in three different ways:
- Long-term care benefits reduce the life insurance payout. This option essentially allows the insured to tap the death benefit amount to pay for long-term care. Once this amount has been spent, no more funds are available and there will be no payout when the person dies.
- Long-term care coverage is a separate benefit. In this case, it doesn’t affect the life insurance payout or other policy benefits.
- Long-term care benefits reduce the life insurance payout, but the rider also provides extra coverage for long-term care. For example, let’s say a policy has a $100,000 death benefit and a $200,000 long-term care rider. Once $100,000 has been paid out for long-term care, no more funds are available for a death benefit, but the policy will continue to pay long-term care benefits up to the $200,000 limit.
A hybrid insurance policy combines long-term care insurance with either life insurance or annuities. These policies allow more flexibility in long-term care benefits. They are commonly purchased with a single premium, though a couple of companies offer a policy with ongoing premiums.
Using accelerated death benefits
When shopping for life insurance for your parents, ask whether the plans offer accelerated death benefits. These benefits, which may cost extra, can sometimes help cover the costs of terminal illness, a life-threatening diagnosis or long-term care.
In essence, your parents can receive a tax-free advance of a portion of the death benefit in case of emergency, so you don’t have to dip into other assets to pay those costs.
Keep in mind that using accelerated death benefits will reduce the payout when your parents die. But if you’re buying life insurance for aging parents, you may be glad to have the option to use some of the funds rather than paying out of pocket.
Types of life insurance policies for parents
Here are some types of life insurance that can be suitable options for parents.
Term life insurance
Term life insurance has level rates for a certain period, such as five, 10, 20 or 30 years. The coverage ends when the policy term ends unless there is an option to renew. If renewal is an option, expect the premium to be much higher.
One of the advantages of term life insurance is that it costs less than other types of life insurance. Term life insurance might be best if your primary concern is covering the years of a mortgage or other debt, or replacing income if a parent passes away.
Universal or whole life insurance
Universal life insurance and whole life insurance are options if you want to ensure a policy is in place no matter when a parent dies. It is important to know that even though universal life is a type of permanent life insurance, some universal life policies have a maximum age specified. For example, the policy may be “up to age 95,” and getting a higher age cut-off is more expensive.
Whole life and universal life insurance policies can potentially build cash value, although some policies may take many years to build significant cash value. Cash value life insurance allows you to tap into the policy while the insured person is still alive.
These types of life insurance cost more than term life insurance, but you can typically depend on getting a death benefit regardless of when a parent passes away. The death benefit can be used by the beneficiary for anything they like.
Guaranteed issue life insurance
Guaranteed issue life insurance doesn’t require a medical exam, and you can’t be turned down, so it’s an option for a parent who can’t qualify for traditional life insurance due to health issues or age. But this option is one of the most expensive ways to buy life insurance.
Guaranteed issue life insurance death benefits are usually very low, between $5,000 and $25,000. These policies typically have a waiting period of two years before a beneficiary can get the full policy payout, unless the cause of death was an accident, like a car wreck. Otherwise, if the policyholder dies during the first two years of the policy, the beneficiary may only get a refund of the paid premiums plus some interest.
This is called a graded death benefit, which helps life insurers protect themselves against severely ill people who buy guaranteed issue life insurance at the end of their lives.
Final expense life insurance
Final expense, or burial insurance, is meant to pay for a parent’s funeral costs and unpaid medical bills. It’s generally a whole life insurance policy that supplies a small payout when the insured person dies.
How to buy life insurance for your parents
Once you know the type of life insurance and how much you need, you can start shopping for a policy. Compare life insurance quotes and benefits from several insurers, regardless of what kind of life insurance you’re buying. Also, be sure to check the company’s financial strength, an indicator that the company can pay all its future claims. For example, an AM Best rating of A+ means companies have demonstrated a superior ability to meet their financial obligations in the eyes of AM Best.
You’ll want to be sure your parents are willing to go through the application process. For instance, if an insurer requires a medical exam for a parent as part of the application, Mom or Dad would need to agree to that. Note that the insured parent must answer application questions on their own.
The life insurance company will review their health information, as well as other data, such as driving records. Your parents may also need a life insurance medical exam as part of the life insurance buying process. All of that information influences the insurance company’s decision and how much it will charge for a policy.
During the application process, the life insurance company will want to verify your insurable interest if you are going to buy life insurance for a parent. This may involve providing identification and a phone interview with the insurance company, where you can answer questions about your financial relationship with your parents.
When your parent applies for a policy, they’ll need to sign the application.
An adult child could be both the policyholder (who is ultimately responsible for paying the policy premiums) and the beneficiary.
How much does life insurance policy for parents cost?
When considering life insurance for your parents, understand that age plays a significant role in determining the cost. Generally, life insurance premiums increase as someone gets older.
For example, a 10-year term policy offering $250,000 in coverage averages around $45 per month for a 50-year-old. However, that same policy can cost an average of $243 per month for a 70-year-old.
Beyond age, several other factors can influence the cost of life insurance for older adults:
- Health Status: Pre-existing conditions or a history of illness can drive up premiums.
- Lifestyle Choices: Smoking or high-risk activities can also affect costs.
- Policy Type: Whether it’s term, whole or universal life insurance, each has its own pricing structure.
- Coverage Amount: The higher the death benefit, the higher the premium.
- Payment Frequency: Whether you opt for monthly, quarterly or annual payments can slightly alter the overall cost.
The table below breaks down how costs differ by age, coverage amount and term limits to give you an understanding of what to expect.
How much life insurance policy coverage should you get for your parents?
To decide how much life insurance coverage your parents need, figure out how their loss will affect you financially.
Ask yourself these questions:
- Do your parents have money set aside to pay for funeral costs?
- Do they have debts that they will pass on to you?
- Will you need financial help caring for a surviving parent?
- Is it possible they will need expensive end-of-life care?
- Do they have a mortgage you must pay after they die?
- Do you have money to pay for property taxes on their home and other expenses?
Once you figure out how much you need, you can decide on the coverage amount and the type of policy that works best for your situation. For instance, you can get a low-cost final expense life insurance policy if you need money only for final expenses and funeral costs.
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