Liquidating Life Insurance: A Parent's Guide To Policy Cash-Outs

Life insurance is a crucial aspect of a family's financial safety net, and it's not uncommon for parents to hold a policy for their children or vice versa. While it's possible for adult children to purchase life insurance for their parents, it's essential to understand the process and requirements. The first step is to establish insurable interest, which means proving that the death of the insured person would cause financial hardship for the policyholder. This could include funeral expenses, end-of-life medical costs, or any debts or financial obligations that the policyholder would inherit. The next step is to get consent from the parents and fill out an application, which may include a health questionnaire and a medical exam. The policyholder then needs to decide on the type of life insurance, such as term or whole life insurance, and choose a suitable company and plan. It's important to note that the policyholder must be listed as the beneficiary to receive the benefits upon the insured person's death.

You can buy life insurance for your parents if you meet certain requirements

Yes, you can buy life insurance for your parents, but only if you meet certain requirements and have their consent. This is known as having an "insurable interest", which means that you would be responsible for the financial consequences of your parent's death. For example, you may have to inherit your parents' house and mortgage, or you may have co-signed on debts with them.

You will need to provide some sensitive information, such as your parents' Social Security number, name, and address, and they will need to sign the application. Depending on the insurance company and the type of plan, your parents may also need to undergo a medical exam.

It is important to note that you cannot take out a life insurance policy on your parents without their knowledge. Additionally, the cost of the insurance will be higher if your parents are older and less healthy. Therefore, it is generally recommended that you purchase the policy when your parents are younger and healthier, as you will have more options and the premium will be less expensive.

You must get your parents' consent before taking out a life insurance policy on them

It is possible to take out a life insurance policy on your parents, but you must have their consent to do so. This means that you will need to have a conversation with your parents about this, and they will need to sign the application. You will also need to provide some of their personal information, such as their Social Security number, name, and address.

In addition, you will need to prove that you have an "insurable interest", meaning that you would suffer financially if they died. For example, if you rely on their income or would have to pay their mortgage or medical bills after they pass away. This is usually straightforward when insuring a parent.

It is worth noting that it is generally easier for your parents to take out a life insurance policy themselves and name you as the beneficiary. They will not need to prove insurable interest and can go through a similar application process.

You'll need to fill out an application with sensitive identification information

When applying for life insurance, you will need to fill out an application form with some sensitive identification information. This is to ensure that the insurance company has as much information as possible about you before it makes a decision on your health risk rating. The application will include basic information such as your name, address, phone number, date of birth, state/country of birth, citizenship, marital status, occupation (including job duties and salary), net worth, driver's license number, and social security number.

The social security number is used to confirm your identity, order your medical records if necessary, and look up your records in the Medical Information Bureau (MIB). It is also needed if you pass away, which must be reported to the IRS for tax purposes.

Your driver's license number is needed so that the life insurance company can look up your motor vehicle records and verify your driving history. This is an important factor in determining your risk classification when it comes to underwriting.

In addition to the above, the application will also likely include a health questionnaire with important questions about your height, weight, lifestyle habits, and medical history. Depending on the type of policy, you may also need to take a medical exam.

The insured or a beneficiary can own the policy

A life insurance policy generally involves three key parties: the owner, the insured, and the beneficiary. The owner of the policy has control over it and is responsible for paying the premiums. The insured is the individual whose life is covered by the policy. Should they pass away while the policy is active, their beneficiary receives a payout.

The insured or the beneficiary can own the policy. The owner does not necessarily have to be the one who pays the premium. For example, if your parent is on a limited income, they could own the policy while you handle the monthly payment. As long as you're listed as the beneficiary, you'll receive the benefits when they pass.

In order to own the policy as a beneficiary, you will need to prove you have insurable interest. That means you will have to show that you would be financially impacted by the insured person's death. This is usually fairly easy when trying to insure a parent. For example, if you rely on income from the deceased to pay rent, or if they have a mortgage or medical bills that will need to be paid after they're gone.

If your parent owns the policy, they have the right to name or change beneficiaries. They can also transfer ownership.

You'll need to prove insurable interest

To take out a life insurance policy on your parents, you will need to prove that you have an insurable interest. This means that you will have to show that you would be financially impacted by their death. For example, if you rely on your parents' income to pay your rent, or if they have a mortgage or medical bills that will need to be paid after they're gone, you have an insurable interest.

Insurable interest is a key requirement in life insurance, designed to prevent fraud and moral hazards, such as situations where a policyholder might benefit financially from causing harm to the insured. It ensures that you have a financial stake in the insured person's continued well-being and would experience financial hardship if they were to pass away.

In a direct relationship, such as through blood, marriage, or adoption, insurable interest is generally easy to prove based on the relationship status. In a business partnership, such as a corporation purchasing a life insurance policy on a key officer, a business contract or other proof that the company will experience financial hardship and loss upon the insured's death is needed.

• Spouse/spouse relationship
• Parent/child relationship
• Grandparent/grandchild relationship

In some cases, you may not have an insurable interest in your parents. For example, if you are financially independent and would not be responsible for their funeral services, burial/cremation costs, end-of-life medical expenses, or any other financial obligations, you may not have an insurable interest.

It's important to note that you must have your parents' consent to take out a life insurance policy on them. They will need to provide their signature and sensitive identification information, such as their Social Security number.

Frequently asked questions