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How to buy life insurance for your parents
Learn the ins and outs of taking out a policy on your parents — even if they're ill or elderly.
The unexpected death of a parent can take an emotional and financial toll on your family. If your parents have assets to protect, or if you’re not sure whether they can cover their debt and medical expenses as they age, you might consider taking out a life insurance policy on them. It’s possible — under a few conditions.
Can you actually buy life insurance for your parents?
Yes — but you’ll need to do two things:
- Demonstrate an “insurable interest.” If you can prove that you’ll suffer financially when your parents die, your insurer will be more likely to underwrite a policy. Since debt and final expenses are often passed on to the next of kin, family members often don’t have an issue proving insurable interest.
- Get their consent. You can’t buy life insurance for someone without their knowledge. Your parents will need to approve and sign off on the policy documents before the coverage goes into effect.
How to buy a life insurance policy for your parents
Buying a life insurance policy for your parents is just like shopping for coverage for yourself. Follow these steps:
- Determine how much coverage you need. Consider your parents’ assets, debt, savings and other financial obligations, and try to take out a policy to match.
- Choose a policy type. There are two main categories: term life insurance lasts a set period of time, while permanent life insurance offers lifelong coverage and builds cash value over time. Term life insurance is sufficient for most people, but if your parents have a higher risk tolerance and want to treat their policy as more of an investment, permanent life insurance might be a better fit.
- Look at available riders. If add-ons like a waiver of premium or disability rider are important to your parents, go for an insurer that offers these riders.
- Compare quotes from a range of insurers. Premiums can vary wildly between insurers, especially for seniors who may have health conditions. Get quotes from a handful of insurers to ensure you’re getting the lowest rates.
- Decide on the owner and beneficiary of the policy. If you’re taking out a policy on your parents, you may be both the owner and beneficiary. But ultimately, it’s your parents’ say.
- Apply for a policy. Once you’ve hammered out all the details and chosen a carrier, apply for a policy and submit any supporting documentation.
Can I still buy a policy for my parents if they’re in poor health?
Yes — your options just may be more limited. To begin, look at insurers with lenient underwriting guidelines, and carriers who specialize in high-risk applicants (like seniors).
If your parents have serious health conditions or want to skip the medical exam, consider purchasing a guaranteed issue policy. These policies are open to anyone — no questions asked — but you can expect to pay more for coverage.
These companies can help you get life insurance for your parents
If you’re able to prove “insurable interest” and you have consent, our curated list of companies in the table below can help you find a policy that fits your needs.
Why consider taking out a life insurance policy for your parents?
There are a number of reasons to take out a life insurance policy for your parents. Even if you don’t rely on them for financial support, life insurance offers financial protection that you likely won’t find elsewhere. A life insurance policy can cover:
- Funeral expenses. When all is said and done, funerals can cost $10,000 or more. Life insurance can help cover funeral expenses so that you’re not forced to pay out of pocket. Some policies even offer specific add-ons to cover these expenses — something to consider as you shop around.
- Health care. Whether your parents’ health is declining or they have routine medical costs, life insurance can help cover the bills. Depending on the coverage, your policy might offer an early or increased payout to cover medical expenses. Speak with your provider to determine which policy and riders are best for your situation.
- Debt. If your parents have any outstanding debt, be it mortgage payments, credit card bills or anything else, you may be held financially responsible when they die. Life insurance can provide the means to pay off any outstanding debts. Speak with your provider to determine how much coverage you’ll need to pay off debts, medical and final expenses.
- Replacement income. If you, your spouse or other dependents rely on your parents for income, life insurance might be a good idea. Even if you’re eligible for government assistance programs, a life insurance payout can supplement your income to help you remain financially stable after a parent dies.
- Taxes. If you’re responsible for the inheritance or estate tax when a parent dies, it’s likely you’ll pay taxes. How much taxes you’ll pay depends on factors like their state of residence and net worth. There are often thresholds to be met before any taxes apply, but it never hurts to be prepared. Life insurance can help reduce the financial burden of taxes.
- Legacy. Many people purchase life insurance for their parents if they plan to leave an inheritance or legacy to their next of kin. Whether it’s cash, property or retirement funds, life insurance payouts can provide a substantial amount of savings to beneficiaries.
- Charitable donations. If you or your parents would rather donate to a charity, consider doing so through life insurance. While cash donations go a long way, life insurance payouts can provide a much larger contribution since the proceeds are generally tax-free.
What is the Goodman Triangle?
Life insurance payouts to beneficiaries are generally not taxable. Estate taxes only apply if the value of the estate exceeds the threshold, which is $11.2 million for 2018. Beneficiaries are generally exempt from inheritance taxes, and will likely receive the entire death benefit amount. However, there is an exception called the Goodman Triangle that creates an unexpected gift tax liability.
Generally, life insurance policies involve three parties:
- Person A — the insured
- Person B — the policy owner
- Person C — the beneficiary
In many situations, the insured is also the owner of the policy, but when it comes to buying life insurance for your parents, that’s not the case.
The Goodman Triangle occurs when the owner of a life insurance policy is not the insured and not the only beneficiary. When the owner of a policy appoints a fourth party — another beneficiary, their payout is considered a gift.
While the owner of the policy is still alive, they have the power to remove beneficiaries, and any payout is considered incomplete. Once the insured dies, the gift is deemed completed. Unlike life insurance payouts, gifts are subject to taxes, and the owner of the policy is responsible for that tax payment.
Here’s an example:
Jerry has two children, Mike and Bob. Mike takes out a life insurance policy on Jerry for $1 million with the understanding that the payout is split between the two siblings.
Bob is named the beneficiary but isn’t listed as an owner of the policy.
When the death benefit is paid out, Mike and Bob both receive $500,000. But because Bob isn’t listed as an owner, his half is considered a gift from Mike — the owner of the policy. Mike is now responsible for the gift tax on $500,000.
How can you avoid the Goodman Triangle?
There are a few ways you can avoid running into the Goodman Triangle:
- List only one beneficiary, but that might prevent other beneficiaries from getting their share.
- List all beneficiaries as owners of the policy. But there are cases where the insured is against certain beneficiaries having power over the policy.
- Register an irrevocable life insurance trust as owner of the policy. While it isn’t free, it keeps the death benefit separate from the estate and avoids gift taxes.
Alternatives to taking out a policy on your parents
If you don’t think you’ll be able to cover your parents’ funeral, medical or end-of-life expenses, explore these ways to mitigate those costs:
- Ask your parents to purchase life insurance coverage. Instead of you taking out a policy on your parents, encourage them to manage the process and name you as a beneficiary. Regardless of the type of policy they choose, you’ll receive a guaranteed death benefit when they pass away — as long as they keep up with their premiums.
- Prepay for funeral costs. With the average funeral costs running into the thousands, it might be worth prepaying your parents’ funeral and burial costs. You can do this through a funeral home.
- Set up a dedicated savings account for end-of-life expenses. Contribute to it regularly, or ask your parents to add funds to it if and when they can.
Yes, you can buy life insurance for your parents. The process is similar to purchasing a policy for yourself — but you’ll need to prove insurable interest and get your parents’ consent.
To make sure you”re getting your parents the best possible protection, compare life insurance companies.
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