It is common practice for parents to purchase life insurance in order to provide financial security for their children and surviving spouses. However, this is not the only way that insurance can be utilized. In certain circumstances, it might make sense for a kid to purchase life insurance for their parents. The death of a parent can be emotionally distressing and is generally not something anyone wants to think about. Nevertheless, it is essential to take into account any potential negative monetary effects that may be the outcome. For example, if your parents are your primary source of financial assistance or if you are responsible for bills that your parents are currently paying, their death could put you in a difficult financial situation. Alternately, you could simply like to have enough money to pay for a memorial service that is fitting and commemorates the lives of your parents.
Key Takeaways
There are several situations in which it is possible to purchase life insurance for a parent. The funds may be used to pay for funeral expenses, offer financial support to surviving family members, or for other purposes. End-of-life care may be covered by some insurance in advance of the death benefit being paid out. Beneficiaries do not normally have to pay taxes on death benefits, but it is important to consult a certified public accountant before making any decisions.Do You Have the Ability to Purchase Life Insurance for Your Parents?
It is possible to purchase life insurance on behalf of a parent, and you can even name yourself as the beneficiary of that policy. However, in order to do so, you will need to fulfill a number of prerequisites. You need to have an insurable interest in someone else in order to purchase life insurance on their behalf. To phrase it another way, there must be a negative financial or, in some situations, emotional impact on you as a result of the death of the insured person in order for you to qualify for the life insurance policy. In many cases, it is assumed that close family members, like parents, automatically meet the requirements. Consent is vital. Any policy that protects a person's life often requires that the person whose life is being insured be aware of the policy and give their consent to it. Purchasing life insurance for your parents is an important financial decision that should not be taken lightly. For example, if you purchase coverage, you may be the policy's owner while your parent is the policy's listed insured. The owner of the policy is the person who submits the application for the policy, maintains ownership of it, and is typically responsible for paying the premiums. The insurance policy owner can make changes to the beneficiary, like changing their name, as well as cancel the policy and take other steps. Named insured: The person whose life is tied to the insurance policy is referred to as the policy's named insured. The payout on the policy is initiated when the named insured passes away.Why Is It Necessary to Purchase Life Insurance for Your Parents?
Purchasing life insurance for a parent is a responsible decision that should be made for a variety of reasons. There are several benefits of life insurance that can become payable even before the insured person passes away.Repay All of Your Debts
It may make sense to purchase life insurance for a parent if the loss of that person would cause significant financial difficulty for the family. If you were to cosign a loan for a parent so that they might borrow money, for instance, you might want to take precautions to safeguard yourself and your immediate family. There is also the possibility that you and your siblings would like to keep a family home that has an outstanding mortgage debt, but that you do not have the cash necessary to pay off the mortgage. In circumstances such as these, life insurance can clear up any outstanding financial obligations and make the loss a bit more manageable.Take Care of Members of the Family
You have the option of purchasing life insurance that will offer financial support for any siblings or other members of your family who are dependent on your parents for financial assistance. Those with specific requirements, in particular, may require more financial support, and life insurance can provide that money if purchased in the appropriate amount.To Cover Final Expenses
You also have the option of purchasing a life insurance policy to assist with paying for last expenses following the loss of a parent. Some of these costs could be for the memorial service, the funeral, the cost of travel for guests, and other things.The provision of care throughout the life
Even if your parents are still alive, their life insurance policy may be able to provide financial support. You might be able to collect a portion of the death benefit before a parent passes away if your insurance policy allows for an accelerated death benefit, often known as an ADB. This could be of great assistance in the event that a parent has significant medical expenses or requires long-term care. When you use an ADB, you are getting an advance on the death benefit of the policy. This means that the beneficiaries will get less money than they would have gotten otherwise.Purchasing a Life Insurance Policy for Your Parents: Some Helpful Pointers
If you want to get insurance for your parents, the steps that follow can assist you in covering some of the most critical aspects of the policy.Examine the different coverage options you have.
There is a wide variety of insurance available, and the plan that is best suited to meet your requirements will depend on those requirements. You can organize your options into two primary buckets: term insurance and permanent insurance. Term insurance and permanent insurance are the two primary categories. Term insurance offers protection for a predetermined period of time (referred to as the term), which can range anywhere from one to thirty years in length. Coverage will be terminated at the conclusion of the term or whenever you stop paying the premiums, whichever comes first. Regardless of how long your parents live, the coverage provided by permanent insurance will continue in effect for as long as the premiums are paid. Permanent insurance policies usually have a cash value that can be used to pay for unexpected costs or to pay the premiums. There is a possibility of repercussions if the cash value of a life insurance policy is used. Before taking any action, you should first review the specifics of the situation with your insurance agent and your certified public accountant (CPA). In certain circumstances, you may be required to pay taxes, lose coverage, or reduce the death benefit. The premiums for term insurance are typically lower, but the coverage is only valid for a set amount of time. It can make more sense to purchase a permanent life insurance policy rather than a term one if you want to plan for unexpectedly long life. There is also the possibility of using life insurance to pay for bills incurred prior to passing away. You may be able to take an advance against the death benefit with the use of an ADB rider that is included in some policies. In order to be eligible, the insured person must be given a diagnosis (after the policy has been issued) of a terminal illness that is anticipated to result in death within a short period of time. The money can be used to assist in paying for end-of-life care as well as other expenses. However, using an ADB will result in a reduction in the death benefit that the beneficiaries ultimately get. There is a choice of having ADB riders added to either term or permanent policies. Think about getting final expense insurance if you need a reasonably priced policy that will cover more manageable costs like a funeral. The death benefits on these plans are not very large, but the money should be enough to cover the cost of a burial or cremation and any other costs associated with the funeral. It is possible that getting accepted may not be difficult because there is typically no requirement for a medical test, and it is also possible that you will not be asked any health-related questions. However, policy costs tend to be greater for the amount of death benefit purchased when compared to a policy that needs medical questions and a medical exam. This is true no matter if the policy calls for a medical exam or not.Consider how much you really need
The process of selecting the appropriate death benefit might be difficult. It is always preferable to have a larger death benefit, even though doing so requires paying higher premiums. Determine the costs that need to be covered by the death benefit, and then check to see if you can afford the level of coverage you've selected. For instance, you might purchase insurance, for instance, in order to cater to a sister who has unique requirements. Estimating the one-time sum of money that will give your sibling all of the resources they will require for the remainder of their life can help you arrive at a number that is suitable. You may need the assistance of a financial advisor or an insurance agent to do those calculations. Keep in mind that the amount you require may go down if you and your siblings get any assets as an inheritance.Find out who will be the owner of the policy.
The owner of a life insurance policy has the authority to make modifications to the policy, including changing the beneficiaries, canceling the policy, and making other modifications. The payments are also the responsibility of the owner. Because of this, it is extremely important to correctly identify the individual in question. If you are purchasing insurance for your parents in order to protect yourself, it is possible that it would be prudent to become the owner of the policy. You can, of course, designate a different owner for the policy. However, if you want your parents or anybody else to have control over it, you will need to do so.Examine the repercussions in terms of taxes
Have a conversation about your plan with a certified public accountant (CPA) to gain a better understanding of the potential tax implications of your insurance policy. A death benefit that is paid to beneficiaries is typically exempt from taxation in the vast majority of circumstances. However, it is possible to run into issues with the government about taxes while dealing with life insurance. For example, there may be tax consequences if you transfer the policy to another person or pay an excessive amount into a permanent policy. The same is true if you overpay for a variable life insurance policy.Prepare for the Appropriate Moment
Rates for life insurance is typically determined by the age of the insured as well as their current state of health. As a consequence of this, it is generally recommended that you purchase life insurance as soon as you become aware that you require it. The cost of your parent's health insurance is going to go up as they become older, and they may develop new health problems throughout the course of their lives. If you buy while they are still in a relatively good state of health, you may be able to lock in prices that are lower than normal.Make Sure It Makes Sense
If there is no financial benefit to having coverage for your parents, then it is possible that purchasing insurance is not the best course of action. There is no way to know what the future holds, but it is typically beneficial financially to purchase a policy that will pay off within a few years. It is possible that you will wind up losing money if you are unable to keep up with the payments on your insurance policy for a period of time that would allow it to pay out. Before making a choice, it is important to have a conversation about the specifics of the scenario involving your family with an insurance agent or a financial advisor so that you can weigh the benefits and drawbacks. It can be very upsetting to make the decision to forego purchasing insurance only to have a family member pass away shortly afterward.There are Other Options Available to You in Place of Purchasing Life Insurance for Your Parents
In certain circumstances, purchasing life insurance will not be an option, and even if it is, it may not be the optimal solution. But there is a possibility that there are other approaches to fulfill your requirements.Your parents are responsible for obtaining their own insurance policies.
It is possible that it might be beneficial for your parents to purchase life insurance on their own. This may be the easiest option to carry out if your parents don't have any worries about money and are sure they can handle the process.Insurance for Long-Term Care Needs
If the cost of long-term care is your primary concern, rather than purchasing life insurance, you should look into purchasing a policy that covers long-term care. These insurance policies offer financial assistance to pay for in-home help, nursing facility care, and other costs associated with your parents' care. To get benefits, an insured person must show that they can't do certain tasks or activities of daily living, or they must have been diagnosed by a doctor with a certain illness.Put some money aside for a rainy day.
If you are able to estimate the amount of money you will require for end-of-life expenses, you may be able to put some of it aside in a savings account for when the time comes. Depending on the dynamics of your family, that may be an account that you contribute to on your own, or it may be one to which other members of your family also make contributions.The Crux of the Matter
After the passing of a parent, life insurance might step in to help provide the necessary financial support. The money can be used to pay for burial costs or offer financial support for loved ones, and in some instances, you may be required to take the initiative to purchase insurance coverage. In such a scenario, your parents will be required to take part in some way, but you will still be able to purchase and exercise authority over a life insurance policy on them as long as they give you permission to do so.Questions That Are Typically Asked (FAQs)
My parents' medical expenses and other debts if they pass away without purchasing life insurance?
In most cases, you are not obligated to pay your parents' medical or utility bills unless you specifically consent to do so (by co-signing a loan, for example). If the estate is unable to pay its expenses, the executor or personal representative of the estate may use any assets that are available in order to pay the bills. However, children do not automatically inherit the debts of the estate. Having said that, there are some exceptions to the rule, so you should consult with an attorney to see whether or not you will be liable for any fees.Can I purchase life insurance on behalf of another person?
If you have what's called an "insurable interest" in another person, you can purchase life insurance on their behalf. You can normally get a policy on the life of that individual if their passing will have a detrimental effect on your finances or if they are a member of your family who meets the requirements for such coverage. Still, the person whose insurance you want to buy must give you permission before you can buy it for them, and they may also have to go through a medical exam.Who among us actually requires a life insurance policy?
When there is a potential for monetary loss or a requirement for liquidity, it is prudent to give thought to purchasing life insurance. For instance, if a parent offers financial support to a child who has special needs, a life insurance policy can ensure that there is adequate money for the child's continuous medical treatment in the event that the parent passes away. In a similar way, insurance may help heirs who want to keep a family home even though they still owe money on the mortgage.