People with elderly parents often ask us if it is possible to buy life insurance on behalf of their parents. In many cases, they are worried about paying for the burial or funeral expenses in the event of their parents’ passing.
In some cases, they are worried about the financial consequences of their parents’ death, especially if they are partially dependent on their parents’ income or if they have co-signed a loan with their parents.
The very first thing you need to know about buying life insurance coverage for your parents is that you can only do so with their consent. It is an iron clad rule which cannot be bent or broken under any circumstances.
It is unethical and illegal to take out life insurance on someone without their knowledge or consent. So, if you are concerned about the financial losses that could result from your parents’ death, you should talk to them and get their permission to buy life insurance coverage on their behalf.
In order to be able to buy life insurance on your parents, you need to prove that you have an ‘insurable interest’ in your parents’ survival. You are said to have an insurable interest in a person’s life if you benefit financially from their existence and stand to suffer monetary losses in the event of their demise.
It should be noted that the question of insurable interest does not manifest itself when you buy a policy for yourself or for your minor children. It needs to be proved only when you buy a policy on behalf of a third party who happens to be an adult.
Insurable interest laws are designed to protect and preserve the integrity of a life insurance policy.
In the absence of insurable interest laws, anyone can financially benefit from any random person’s death. A person can buy life insurance on a random person and bag the entire proceeds from the policy when the insured passes away.
It is a clear case of fraud as the insured and the person who pays for the policy are not related in any way and the latter does not stand to suffer any financial loss in the event of the former’s death.
The rule applies to other types of insurance as well. For instance, you cannot insure your neighbor’s vehicle, since you do not stand to suffer financially if it is stolen or if it gets damaged in an accident.
Insurance providers are generally responsible for evaluating and ascertaining insurable interest in cases where a person applies for a life insurance policy on behalf of another person.
So, when you apply for a policy on behalf of your father or mother, the insurance company’s representatives will talk to you and your parents, verify your claims, and find out whether the passing of your parents is likely to affect you financially.
You can determine the coverage amount based on the following factors.
The average cost of a full-service funeral could be anywhere from $7,000 to $13,000, depending on the state you live in. It is one of the most important factors you need to take into account while calculating the amount of coverage your parents need.
Do your parents have any debts that could be passed on to you in the event of their death? If so, you need to factor it into your calculation as well.
For example, if you have co-signed a car loan, business loan, or a mortgage with your parents, you are liable to pay it off in the event of their death. This is something you need to keep in mind while buying life insurance on your parents.
Let us assume that you have a 65-year-old mother who provides childcare for your two children on a full-time basis, six days a week. In her absence, you will have to send your children to daycare or hire a full-time nanny, both of which can cost you a significant amount of money.
In such a scenario, the proceeds from your parents’ insurance policy can help you cover the ongoing expenses associated with childcare.
If your parents have a large estate, you might have to pay state and federal estate taxes in the event of their death. The payout from an insurance policy can help you settle the tax bill and inherit the estate without any trouble.
Apart from this, if your parents have any unpaid medical bills or any other debts for which you could be held liable, you also have to take it into account while calculating the amount of life insurance coverage to purchase for your parents.
There are a number of reasons why you should be careful while calculating the amount of life insurance coverage needed for your parents.
First, if the amount is too small, it might not cover the financial losses caused as a result of your parents’ death. A very large amount, on the other hand, might raise a red flag, which might force the insurer to scrutinize your application very thoroughly, which in turn might delay the approval process.
Moreover, if the coverage amount is unrealistically large, you might get turned down by the insurer in many cases.
In addition to that, if you apply for a policy with a large death benefit, the insurer might ask your parents to undergo a medical exam or at the very least answer a set of health questions.
Depending on your parents’ health condition, the cost of the policy could increase considerably. So, you need to assess your current financial situation in a realistic manner, calculate the financial loss that could result from your parents’ death, and buy an appropriate amount of coverage.
You can choose to buy a term life policy, permanent life policy, final expense policy, or a guaranteed issue policy, depending on a number of factors. There are many different types of life insurance to choose from.
A term life policy provides you with a lump-sum payment in the event of your parent’s death. It does not build any cash value while it is in force.
You might be, however, able to access the death benefit in case a parent becomes disabled or terminally ill – by adding the appropriate riders at the time of buying the policy.
A 10-year, $100,000 term life policy for a 70-year-old male is likely to cost around $100 per month, assuming the person in question does not have any health problems.
A permanent life policy, as you know, offers living benefits as well as a guaranteed death benefit. Depending on your preference, you can buy a whole life policy, universal life policy, or a variable life policy for your parents.
The cash value of a whole life policy builds at a steady rate, irrespective of how the market or the insurance company performs.
The cash value growth of a universal life or a variable life policy, on the other hand, is dependent on the performance of the investment accounts. So, a whole life policy is certainly the least risky option among the three types of policies.
The downside of permanent life insurance policies is that they can be prohibitively expensive, especially if the insured happens to be an elderly person. For example, a $100,000 whole life policy for a 70-year-old male can cost approximately $740 per month.
If your parents do not have any debts and you are not dependent on their income, you can buy a final expense policy whose payout is sufficient to cover the costs associated with the funeral service. The payout from such policies usually ranges from $5,000 to $25,000.
A $25,000 final expenses policy for a 70-year-old male can cost around $150 per month.
If your father or mother is terminally ill, they might not qualify for a final expenses policy. In such cases, a guaranteed issue policy might be the only choice left for you.
The policy does not have any approval process, as there are no exams or questions involved. Anyone who applies for the policy can get qualified, irrespective of their health status.
The problem with a guaranteed issue policy is that the premiums are usually higher than most other types of policies, despite the relatively smaller death benefit payout. So, it is worth buying only if you worry a parent might pass away in a short period of time, so that the payout can cover their funeral expenses.
If they live longer than three years, the amount of premiums you pay might actually exceed the death benefit amount you stand to receive in the event of their demise.