Life Insurance for Parents

 

  Term Life Insurance Whole Life Insurance Final Expense Insurance Universal Life Insurance Index Universal Life Insurance Variable Life Insurance
Premiums Level for period of policy or increases every year Level for the life of the policy Level for the life of the policy Flexible based on the needs of the customer Level for the life of the policy Level for the life of the policy
Cash Value Builds based on premiums paid in and paid up additions Builds based on premiums paid in Yes, can be used to pay premiums (not advised) Yes, through sub-accounts attached to market indexes Through sub-account from insurance company's investment pool
Investment Vehicle Attached? No, unless it is a variable policy Technically no, but sub account attached to market index
Guaranteed Death Benefit
Notes Most affordable and provides the best value, dollar for dollar Best used for estate planning purposes for wealthier individuals or older members of the population Provides low amount of death benefits to help offset medical and funeral expenses May become temporarily underfunded and may require additional cash deposits Earns larger returns to build cash value with a safety net to cushion falls For those wishing to maximize long-term returns and willing to take losses

 

Let’s focus on the seven essential facts you need to know about purchasing life insurance for your parents.

1. Agree

In order to purchase life insurance on a parent, or on anyone for that matter, you must have consent.* It’s always necessary for your parent to agree to the life insurance policy. Think of consent as a way for life insurance carriers to protect against bad intentions someone might have.

Just search online for, “foul play for life insurance” and you’ll see plenty of examples as to why consent is crucial. Dark, I know, but we are all aware that not everyone has good intentions.

*Note – an exception to this rule is if a parent is purchasing a life insurance policy on a minor child.

2. Insurable Interest

Every state in the U.S. has insurable interest laws to protect the integrity of life insurance policies.

These generally state that the only people who can take out or hold an insurance policy on the life of another person are blood or legal relatives or those with a financial interest in the survival of the policy’s subject. – Asher Hawkes, Forbes contributor


Here’s an example: Your mom is 72 and lives off her income from a small pension and social security. She provides full-time childcare for your children. She doesn’t have a large amount of debt, but has not saved up for funeral expenses or future medical bills that may occur. Purchasing a modest policy (around $200,000) would likely make sense and would demonstrate an insurable interest.

3. Amount

Deciding on an amount of life insurance to purchase for your parent requires you to consider some important factors:

  • Income
  • Debt
  • Mortgage
  • Other expenses (i.e. medical bills)
  • Funeral expenses

Let’s consider some examples of appropriate life insurance amounts:

  1. Your dad is 68 and owns his house. He lives off his firefighter pension. He carries a moderate amount of debt from the collectible cars he works on. Your dad provides childcare for your family and help around your house regularly. You decide to purchase a policy for $250,000 to cover debts, funeral expenses, and the financial loss you would incur in finding other childcare.
  2. Your mom is 80 and rents an apartment. She lives off of a modest social security payment. She does not carry debt. However, your mom has not saved up money for final expenses. You decide to purchase a policy for $50,000 to cover her final medical bills and funeral expenses.
  3. Your mom is 64 and carries a mortgage for $320,000. She recently retired and lives off a pension and social security. In addition to her mortgage, she carries debt from her car, credit cards, and medical bills. She does not have money in savings or investments. Your mom provides childcare for you three days a week. You decide to purchase a $650,000 policy for her to pay for all debts, final expenses and to provide for future childcare needs.

4. Ownership

The person (or sometimes entity) that hold the rights to the life insurance contract. Ownership is important because he or she can make changes to the life insurance policy, such as:

  • Beneficiary change
  • Transfer of ownership
  • Lowering death benefit
  • Adding or deleting riders
  • Request a rating change for the insured

Important – while ownership of a policy may change, the insured may not change.

If the owner of the policy is also the insured, life insurance carriers will not ask clarifying questions. If you are merely assisting your parent in securing life insurance, and they will own and make payments for the policy, this is a straightforward situation without the need for further considerations.

On the other hand, if you will be the owner of your parent’s life insurance policy, life insurance carriers will require you to provide proof of insurable interest.

5. Payor

The payor of a life insurance policy is who will be making the premium payments. The payor owns the contract and is often the insured of the life insurance policy. However, that’s not always the case. If you are purchasing a policy for a parent, for example, you are the payor and your parent is the insured.

6. Beneficiary

The beneficiary is the person(s), organization, school, church, or business receiving the death benefit from the life insurance policy. Beneficiaries are usually loved ones who would experience a financial burden if the insured passed away. But really, the sky’s the limit when choosing a life insurance beneficiary. In fact, your parent could list their beloved dog as a beneficiary if they wanted to.

Often, the life insurance beneficiary is:

  • Spouse
  • Child or children
  • Small business
  • School
  • Church

When your parent is considering who to list as a beneficiary, these questions help:

  • Who does your parent want to help financially?
  • Would a person or a trust make more sense?
  • What are the beneficiaries circumstances and would they benefit from life insurance proceeds?
  • Is there a contingent beneficiary?
  • Are any of the beneficiaries minors?
  • Does my will match up with the life insurance policy proceeds?

7. Type

Life insurance comes in all sorts of types and sizes.

Let’s look at the five most common types of life insurance policies that children purchase for their parents:

  1. No Exam No exam life insurance is issued without the applicant participating in a medical exam.
    1. Premium rates are often competitive with traditional fully-underwritten life insurance for healthy individuals.
    2. Policy face amounts available: $25,000 to over $1,000,000.
    3. Exact non medical life insurance application process varies by company. Depending on carrier, no exam underwriting may include:
      1. Immediate accept/decline answer (considered Simplified Issue)
      2. Possible APS (Attending Physician’s Statement) order
      3. Request for paramedical exam based on application or interview
    4. Some carriers have age limits or require an exam due to health or age. However, coverage is often offered up to age 80.
  2. Term Life – Traditional, fully-underwritten life insurance.
    1. Life insurance offered for a specific term, typically between 10 – 30 years.
    2. Premium rates are affordable compared to other types of life insurance.
    3. Face amounts can range from $25,000 – over $1,000,000.
    4. Paramedical exam is required.
  3. Whole Life – Also known as Permanent life insurance.
    1. Benefits do not expire.
    2. Can be purchased with or without a paramedical exam.
    3. Face amounts are available from $10,000 to over $1,000,000.
    4. Accumulates a cash value.
    5. Premium rates are more expensive than Term Life.
  4. Final Expense – Life insurance purchased to cover life’s final monetary needs.
    1. Considered a whole life product and benefits will not expire.
    2. Policies typically cap at $50,000 – $100,000.
    3. No paramedical exam and approval can be instant, after completing a health questionnaire.
    4. Often used to cover funeral expenses and final medical bills.
  5. Guaranteed Universal Life – A bridge between Term and Whole life insurance.
    1. Technically a term product that is designed to last your entire life.
    2. Policies can last to over age 120.
    3. Face amounts available from $25,000 to over $1,000,000.
    4. Does not accumulate a cash value.
    5. Regularly purchased by parents to leave a legacy to loved ones.
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