When a parent dies, the last thing a child wants to think about is how they are going to pay the bills. For many, this is a sad reality. There are many things that adult children might have to pay for after a parent passes, including:
- Income for the surviving parent
- Debt
- Mortgage
- Medicare Bills
- Funeral expenses
Life insurance is a way to fill this gap. It is possible to purchase life insurance on your parents, even if they are already retired.
Do my parents have to know I am buying life insurance on them?
Yes, if you are buying life insurance on your parents, they must know. In most cases, it’s considered unethical for a person to have life insurance taken out on them without their knowledge.
What is Insurable interest?
Insurable interest is what must exist for someone to be able to hold an insurance policy on the life of another person. This means that the holder of the policy will suffer a financial loss if the person they are insuring dies. Most state laws say that insurable interest exists for:
- Himself or herself
- Any person depended on for support or education
- Any person who owes you money, property, or services
- Any person who you have vested interest in
In most states, insurable interest is automatic on family. Other situations that might fall under insurable interest are creditors on the people they lent money to, employers on employees, or business partners. Children buying policies on their parents are really not going to have any problem proving insurable interest.
Who owns the life insurance policy?
There are four parts to a life insurance policy: a payor, a beneficiary, an insured, and a owner. The payor is the person paying the premiums. For example, if you pay the premiums for a policy on yourself, you are the payor. The beneficiary is the the person, organization, charity, or business receiving the death benefit from the policy. You can learn more about beneficiaries here. The insured is whose life triggers the policy when they pass. The owner is the person, or sometimes entity, that holds the right to the life insurance contract. In the situation of a child owning a policy on a parent, the child will be the payor, owner, and beneficiary while the parent will the the insured. If someone buys a policy on themself for their family, they are the payor, owner, and the insured while their family members are the beneficiaries.
Know that there are tax consequences if the owner, insured, and beneficiaries are three different people. This is not a normal occurrence, but you just should be aware of this when purchasing life insurance.
Are my parents too old to get life insurance?
There are life insurance policies that will sell to people up to age 89, so the short answer is no; as long as your parents are younger than 89, you can buy insurance on them. The amount of insurance and premium amount will vary though based on your parents age and their health. For example, the policy that will insure up to age 89 is a final expense policy, meaning it is only going to provide around $25,000 in coverage. If your parent has major health issues, a guaranteed issue policy is available for people up to age 80. Guaranteed issue has no health questions, but it does have a higher premium, as you can see in the example below. With this specific policy, it will also not pay benefits for 2 years, so if your parents dies in this time, you will only receive the premiums paid plus some interest, not the death benefit. There are other options for life insurance for your parent as well, just make sure you consult a qualified broker and get all your options before making any decisions.
