Often, there’s a need for parents to have life insurance and they just haven’t taken the steps to buy it. They’re not alone. How to buy life insurance.
Consider the following statistics:
1. Most Americans believe in a need for life insurance.
Nearly 9 in 10 consumers (86 percent) agree that most people need life insurance. -LIMRA, 2016 Insurance Barometer Study
2. A gap exists between the financial needs of many Americans and how much life insurance they own, if any.
Three out of five Americans (60 percent) report owning some sort of life insurance (individual and/or group), and more than a third of Americans (34 percent) said they are at least somewhat likely to purchase life insurance in the next year. -LIMRA, 2016 Insurance Barometer Study
Understanding a need and taking action on that need are two entirely different things. Besides, purchasing life insurance is about as fun as watching paint dry.
Putting off purchasing life insurance happens all the time. Parents will tell us:
I need to talk to my spouse or partner
My budget won’t allow the purchase
I just haven’t gotten around to it
I don’t like to think about dying
Totally understandable. Yet, securing life insurance is more affordable and straightforward than you think, and that peace of mind is priceless.
You may be wondering if you can buy life insurance for your parents and help them take care of that need. The answer is: YES, you can.
Here’s the truth – If someone would suffer financially should your parents die, they need life insurance.
Let’s focus on the seven essential facts you need to know about purchasing life insurance for your parents.
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.
Key takeaway – In almost all cases, it’s considered unethical for a person to have life insurance taken out on them without their knowledge. Consent provides a safeguard and consent is required.
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.
Key takeaway – If you purchase a life insurance policy on someone (like your parent), you need to have an interest in them surviving. Likewise, a financial burden would occur if they were to die.
Liability car insurance
Deciding on an amount of life insurance to purchase for your parent requires you to consider some important factors:
Other expenses (i.e. medical bills)
Let’s consider some examples of appropriate life insurance amounts:
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.
Your mom is 78 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.
Your mom is 62 and carries a mortgage for $300,000. 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 $600,000 policy for her to pay for all debts, final expenses and to provide for future childcare needs.
Key takeaway – Life insurance carriers require you purchase an appropriate amount of coverage for your parent’s situation. Too much raises a red flag. Too little won’t provide the type of financial protection you need.
The person (or sometimes entity) that hold the rights to the life insurance contract. Ownershipis important because he or she can make changes to the life insurance policy, such as:
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.
Key takeaway – Ownership of the policy is straightforward if it will be owned and paid for by the insured: your parent. If you will be the owner of your parent’s life insurance policy, it’s crucial that it’s properly setup to protect you financially and insurable interest is established.
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.
Key takeaway – The individual or entity making the premium payments is the payor. The payor is considered the owner of the contract.
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:
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?
Key takeaway – Carefully choosing a beneficiary prevents future policy headaches. Be sure to work with an expert agent to guide you through the process.
Life insurance comes in all sorts of types and sizes.
Let’s look at the four most common types of life insurance policies that children purchase for their parents:
Simplified Issue – Also know as No Exam or Non Med life insurance.
Life insurance is purchased without participating in a paramedical exam.
Premium rates are comparable to traditional fully-underwritten life insurance for healthy individuals.
Policy amounts typically cap at $500,000.
Some carriers have age limits or require an exam due to health or age. However, coverage is often offered up to age 80.
Term Life – Traditional, fully-underwritten life insurance.
Life insurance offered for a specific term, typically between 10 – 30 years.
Premium rates are affordable compared to other types of life insurance.
Larger policy amounts offered, even over $1,000,000.
Paramedical exam is required.
Final Expense – Life insurance purchased to cover life’s final monetary needs.
Considered a whole life product and benefits will not expire.
Policies typically cap at $50,000 – $100,000.
No paramedical exam and approval can be instant, after completing a health questionnaire.
Often used to cover funeral expenses and final medical bills.
Whole Life – Also known as Permanent life insurance.
Company life insurance
Can be purchased with or without a paramedical exam.
Larger policy amounts offered.
Accumulates a cash value.
Premium rates are more expensive than Term Life.
Key Takeaway – Understand the components of different types of life insurance policies in order to make an informed decision for your parent.
Bottom Line (And A Warning)
Purchasing life insurance for a parent is common and provides financial peace of mind for the family. If your parents agree to the policy, it’s legal and can be a smart investment in your family’s future.
To review, here are the four main parties to a life insurance contract:
Owner – the person (or sometimes entity) that holds all the rights to the life insurance policy. The owner is who can make changes to the policy. They are ultimately responsible for the purchase of the contract.
Insured – the person whose life is insured by the policy. Often, the owner and the insured are the same person. If the owner is not the insured, life insurance companies will ask for you to demonstrate an insurable interest ( see #2 ).
Beneficiary – the person(s) who will receive the death benefit upon the death of the insured. In the case of your parent, the beneficiary is often the child (or children) of the parent.
Insurer – the life insurance carrier providing the life insurance contract.
WARNING – It’scrucial that the policy is setup appropriately.There is the possibility of falling into a tax trap if your parent’s life insurance policy is not handled carefully. Life insurance proceeds are usually tax-free, except when the owner, insured and beneficiary are three different people. This is known as the Goodman Triangle.
An example of how the Goodman Triangle can happen:
A son owns a life insurance policy on his mom. The son’s daughter is named as the beneficiary. For tax purposes, the policy proceeds are viewed as a gift to his daughter and would be taxed accordingly. The son would be taxed on the “gift” he provided his daughter.
How to avoid the Goodman Triangle:
In most cases, it can be avoided by having two “points of the triangle” be the same person.
In the example above, if the son’s mom was both the owner and the insured of policy, there would no Goodman Triangle.
Key Takeaway – Use caution when setting up your policy and understand how to avoid the Goodman Triangle. Don’t have the owner, insured and beneficiary be three different people.
Apply For Life Insurance For A Parent
The most important first step to take is to collaborate with an independent life insurance agent. An independent agent represents multiple carriers to provide multiple life insurance quotes. Your best interest is at heart and they are not held captive to a particular life insurance carrier. That way, your parent will receive the highest quality policy at the most competitive price they qualify for.