Buying Life Insurance for your Parents

We often think about buying life insurance for ourselves, our spouses, or our children, but sometimes you may find yourself in a situation where you worry about a parent and the expenses that might come up upon their death.  Additionally, the advancement of life insurance with living benefits creates a whole new financial planning strategy to deal with the costs of long term care.

But buying life insurance on a parent does require you to follow certain rules, and can often require a slightly more involved application process.  So with our years of experience working with clients spanning all kinds of unique situations (including the need to purchase a life insurance policy on a parent), we can help give you a roadmap to navigate this area of life insurance.

Can I Buy Life Insurance on my Mom or Dad?

The short answer is yes, but there is a lot of qualifiers to this short answer.  First and foremost, keep in mind that anytime you wish to buy life insurance, you must be able to prove to the insurance company's underwriting department that you have an insurable interest in the matter.  This means you must be able to prove that you face a financial loss if the proposed insured dies.

This often sounds much more complicated than it really is.  Most people face real financial loss when their parents pass away.  If nothing more, you'll lose whatever assets your parents held that go towards the cost of a funeral.  For some people, this sort of loss may not be worth insuring; others might not view it the same way.

The important thing to understand is that you must identify an insurable interest and be ready and willing to explain that insurable interest to an insurance company if/when you chose to apply for life insurance.

How do I Buy Life Insurance on a Parent?

The application for a life insurance policy that you buy on a parent is similar to the application process you'd undergo if you bought life insurance on yourself.  The major difference is that you will act as owner and (presumably) payor of the policy.  You will not be the insured under the policy.  This means none of the health questions in the application apply to you.  These questions instead apply to your parent.  Your parent will undergo the health exam/screening for the life insurance application (if applicable).

But there are two critical points you must be sure you address when applying for life insurance in this fashion.  These two points are applicable to every life insurance application, but you may not have paid much attention to them when you applied for life insurance because the way they default was less important than in a situation where the owner and insured of the policy is different.Applying for Life Insurance with Parent

First, you'll have the option to name a contingent owner of the policy.  If you do not select one, the insured will normally default as the contingent owner.  This is okay if mom or dad is willing to take ownership of the policy and pay the premiums due should you pass away.  But this may put your loved ones in a sticky situation if mom or dad has experienced decreased mental capacity in advanced age and you die unexpectedly.  It's wise to have a backup plan for the possibility that you'll pre-decease your parents.  While it's unlikely, it's never impossible.

Second, you have to pay extra close attention to how you name beneficiaries in this case.  Since the owner and the insured are different people, you do not want yet another named person or entity to be the beneficiary of this life insurance policy.  If you do this, you'll create a Goodman Triangle and the death benefit will be subject to gift taxes.

Tied to the beneficiary discussion, if you have siblings, it may be tempting to name them co-beneficiaries, but this is a bad idea as a portion of the death benefit will meet the Goodman Triangle definition.

There's a subtle, but important third point to make given this information.  It's usually best to be the owner and beneficiary of a policy in this situation (i.e. where you are buying life insurance on your parents).  But you might be tempted to name a different contingent owner from the contingent beneficiary.  If you die, you'll create a Goodman Triangle.

What is the Best Life Insurance Policy to Buy for my Parents?

The best type of life insurance for your parents is highly dependent on circumstances.  If the potential loss you are trying to insure against is temporary, and mom or dad is still young enough to qualify for term life insurance, it could be an option.  Just understand the temporary nature of term life insurance.

However, most purchases for life insurance at this stage in life are either whole life insurance or universal life insurance.  Deciding specifically between these two types of life insurance can be complex and usually best approached with the guidance of a trained life insurance professional.  That said, whole life insurance often comes into play when there is a desire to have access to a portion of the premiums paid as cash value you might use in an emergency.  Universal life insurance usually shines brightest when the sole focus is permanent death benefit with zero desire for the policy to accumulate cash value.  There is a special type of universal life insurance for this circumstance.  It goes by many different names, but most commonly you'll see Guaranteed Universal Life Insurance.

The above is merely an introductory guide.  There are many shades of grey and I don't want you to walk away from this article thinking, for example, that your desire to accumulate cash value with such a policy always means that you should seek out whole life insurance.

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