Buying Life Insurance on Your Parents
If you will burden some financial responsibility after your parents pass away, buying a life insurance policy on your parents could give you the financial resources to take care of final expenses, medical expenses, or any other debts that you may have to deal with when settling your parents’ estate. Before you consider buying life insurance on your parents, there are a few important things that you must consider. In this article, we will show you how to go about buying life insurance on your parents and if it makes sense.
Why Would You Buy Life Insurance on Your Parents?
In most cases, you’ll be responsible for settling your parents’ estate when they pass away. For instance, you could be responsible for paying their funeral costs, medical expenses, and other personal debts such as a mortgage or credit card bills. If you don’t think that they’ll have the liquid assets to pay these types of debts, life insurance could provide you with the liquidity needed to properly settle your parents’ estate.
What do I Need to Consider Before Purchasing Life Insurance on My Parents?
You Must Justify Coverage and the Amount of Coverage – Insurable interest is a basic requirement for life insurance. In other words, the death of your parents must financially impact you. Justifying coverage is the easy part as insurance companies understand that most children will be responsible for settling their parents’ estate. Not only does there need to be financial justification for purchasing coverage, but the amount of insurance must make sense as well. The amount of coverage applied for needs to be reasonable. For instance, if your parents have no mortgage on their home and live modestly, applying for $1,000,000 of coverage will raise red flags with the insurance company. A more realistic amount such as $50,000 to $100,000 of coverage usually won’t be an issue.
Your Parents Will Need to Know You are Taking Out Coverage on Them – You won’t be able to take out a life insurance policy on your parents without their permission. They will be required take a medical exam in most cases and they will need to sign the application as the insureds.
Aging Parents Mean Higher Premiums – If your parents are in their 70’s or early 80’s and they are healthy, it is most likely that premiums will be affordable. If either of your parents have health issues, finding affordable fully underwritten coverage could be an issue. Timely planning is important when it comes to purchasing life insurance on your parents. You don’t want to wait too long before securing coverage on your parents. They could develop some sort of health issue, or worse, pass away without coverage.
How do You Set Up a Life Insurance Policy on Your Parents?
Structuring a life insurance is very important. The IRS has specific rules about the ownership of life insurance and taxation. The easiest way to set up a life insurance policy on your parents without raising any red flags is for you to be the owner and beneficiary of the policy and for your parent/parents to be the insured. If you start adding other siblings as beneficiaries, the death benefit could be considered a taxable gift*.
You can either purchase a small policy on each of your parents or a survivorship policy. If each parent has their own policy, you will receive a death benefit when each parent passes away. This will allow you to handle immediate burial expenses and other potential medical debts for the each deceased parent separately. A survivorship policy or a second to die policy will only pay out when the surviving parent passes away. This could come in handy when settling the entire estate.
What Kind of Life Insurance Policy Should You Buy on Your Parents?
You’ll have several policy options when it comes to purchasing life insurance on your parents. Here are some of your options:
Guaranteed Issue Life Insurance – If your parents have serious health issues, guaranteed issue life insurance could be the best option. With these types of policies, you can’t be turned down for medical reasons. The drawbacks to these types of policies are that they are expensive and there is a 2-year waiting period to be eligible for the full death benefit. In other words, if the insured dies within the first two years, the beneficiaries will only receive the premiums paid in plus interest. These policies have smaller face values of $25,000 or less.
Whole Life Insurance – Whole life insurance offers premium, cash value and death benefit guarantees. Since it offers these guarantees, whole life insurance is one of the most expensive life insurance options available. If you are looking to buy life insurance on your parents with a focus on the death benefit and not cash value build up, there are better options available than whole life insurance.
Term Life Insurance – Term life insurance is the most affordable coverage. It offers coverage for 10, 15, 20 years or longer. The problem with buying term life insurance for your parents is that it only provides temporary coverage. If your parents outlive the term, there is no death benefit and it pretty much defeats the purpose for coverage. Term life insurance might make sense if you need to keep premiums low and you are only looking for temporary coverage.
Guaranteed Universal Life – Guaranteed Universal Life (GUL) is permanent coverage that is not structured to build cash value. You can tailor coverage to last to age 90, 95, 100 or even 121. Since these policies aren’t structured to build cash value, premiums are less expensive than whole life and traditional universal life insurance. GUL policies are an excellent option if you’re looking to keep premiums low and you want permanent coverage for your parents.
Survivorship Life Insurance – Survivorship life insurance (SUL) are commonly called second to die policies. These policies are on the lives of two people and pay out when the surviving insured passes away. This would make sense if your goal is a payout after your surviving parent passes away.
What You Need to Know About Buying Life Insurance on Your Parents
Buying life insurance on your parents could be a smart strategy if you will be left with a financial burden when they pass away. In many cases, you will be responsible for settling your parents’ estate and handling burial expenses. This could require some added liquidity that could be best served by life insurance. It is important that you set up the policy correctly so that you don’t create any tax liabilities when the death benefit is paid. Choosing the right product is also important as you want to make sure you choose the most effective product for your strategy or goal. We can help you set up the strategy the right way and help you find the right product for your situation. Please feel free to call us at 888-687-9444 or email us at info@archstoneagency.com.
*This post is for informational purposes only. We do not offer tax advice. Please refer to a qualified tax adviser before implementing any tax sensitive strategy.
About Us
Archstone Insurance Services, LLC is an independent agency that shops over 40 of the top life insurance carriers to provide huge savings on life insurance coverage for our clients. We are happy to answer any questions you might have about any of the insurance products we offer, your planning needs or your existing coverage. Feel free to call us directly at (888) 687-9444 or email us at info@archstoneagency.com.
