Getting Life Insurance For Your Parents: What You Need To Know

Life insurance for parents is a sensitive topic, but it can be a thoughtful and caring decision to ensure their final wishes are carried out and to give them a respectable funeral. It can also help you cover any debts or expenses they leave behind, including end-of-life care or funeral costs. You can typically buy life insurance for your parents if you meet certain requirements, but it's essential to note that you can't do this without their knowledge or consent. In most cases, you'll need to prove that you have an insurable interest, meaning that you would suffer financial loss if they died. This could include funeral costs, end-of-life medical expenses, inheriting their mortgage, or co-signed debts. The type of policy you choose will depend on their age, financial situation, and overall health.

Proving insurable interest

To get life insurance on a parent, you must prove insurable interest. This means that you would experience financial hardship in the event of their death. Insurable interest is a key requirement in life insurance, designed to prevent insurance fraud and moral hazards, such as situations where a policyholder might benefit financially from causing harm to the insured.

In the context of life insurance, insurable interest doesn't always have to be economical. Sentimental interest based on love and affection is sometimes enough. For example, in Pennsylvania, if you are related to someone by blood or marriage, your insurable interest can be based on love and affection. However, if you are not related, you must have a financial interest in the insured person staying alive.

• Funeral services and burial/cremation costs: You may have insurable interest if you will be responsible for these costs.
• End-of-life medical expenses: If you will be responsible for these expenses, you may be able to prove insurable interest.
• Inheriting your parents' house and mortgage: If you will inherit your parents' house and become responsible for the mortgage, this could be used to prove insurable interest.
• Co-signed debts: If you have co-signed any debts with your parents, such as a loan, and would be responsible for paying it off in the event of their death, this could demonstrate insurable interest.
• Financial dependence: If you are financially dependent on your parents and losing their support would cause you financial hardship, this could be used to prove insurable interest.

It's important to note that proving insurable interest is a legal requirement. Without it, the life insurance application will not be approved. Additionally, you must have your parent's consent to take out a life insurance policy on them.

Getting consent

It is important to talk it over with your parent in advance and explain the benefits of the policy. This can be a sensitive and uncomfortable conversation, but it is a helpful one. It is important that your parent understands the necessity of life insurance and that the discussion is approached with the intention to support their wishes.

If your parent agrees, they will need to fill out the application. This may involve sharing private medical information with you. The person whose life is being insured must sign the application.

The consent of the insured parent is also necessary to prove that they are mentally competent to agree to the arrangement and that they understand what they are consenting to.

Figuring out coverage needs

Figuring out your parent's coverage needs involves assessing any debts and the income goals for the family. This will help determine how much life insurance coverage you'll need in the future. Here are some steps to help you calculate the coverage amount:

Calculate your parent's financial obligations:

• Add up all the debts, including mortgage payments, credit card debt, outstanding loans, and funeral costs.
• Consider future needs such as college fees for grandchildren and end-of-life care expenses.
• If your parent is a stay-at-home caregiver, calculate the cost of replacing their services, such as childcare.

Estimate your parent's income:

• If your parent is employed, calculate their annual salary.
• If they are not employed, estimate the income they would need to replace to maintain the family's standard of living.

Multiply the income by a factor:

• Financial experts often recommend multiplying the annual income by 10 as a starting point.
• You can also use the Human Life Value (HLV) approach, which suggests multiplying the income by a factor based on age: 30 times income between ages 18-40, 20 times income for ages 41-50, 15 times income for ages 51-60, and 10 times income for ages 61-65.
• Another method is the Years-Until-Retirement Method, where you multiply the annual income by the number of years left until retirement.

Subtract liquid assets:

• From the total financial obligations, subtract any existing savings, college funds, and current life insurance policies.
• The remaining amount is the coverage gap that life insurance will need to fill.

Choose the right type of life insurance:

• Term life insurance covers a set period, such as 10, 20, or 30 years. It is usually less expensive but may not provide coverage for the entire lifetime.
• Whole life insurance is a type of permanent life insurance, guaranteeing a payout regardless of when the policyholder passes away. It tends to be more expensive but offers longer-lasting benefits.
• Final expense life insurance is designed to cover end-of-life costs, including funeral expenses, legal charges, and medical bills.

Remember, it's essential to consider your family's unique needs and financial goals when determining the coverage amount. Consulting a financial professional can also help you make an informed decision.

Choosing a policy and company

When choosing a life insurance policy and company, there are several factors to consider. Firstly, it's important to assess your life insurance goals and needs. Calculate the optimal insurance cover by taking into account your annual income, family's annual expenses, outstanding debts, future expenses such as education or marriage, and any liquid assets. This will help you determine how much coverage you require.

Next, decide on the type of life insurance that best suits your needs. There are two main types: term and permanent life insurance. Term life insurance provides temporary coverage for a fixed period, typically 10 to 30 years, and is sufficient for most people's needs. Permanent life insurance, on the other hand, lasts a lifetime and provides a death benefit regardless of when the insured person dies, as long as the premiums are paid. It is more expensive but offers a guaranteed payout.

When choosing a company, consider their financial strength and stability by referring to ratings from independent agencies such as AM Best. Review customer complaints and satisfaction ratings, such as the National Association of Insurance Commissioners (NAIC) complaint index, to gauge the company's track record. Additionally, assess the company's policy types, riders, and application process to ensure they meet your specific needs.

Get quotes from multiple companies and compare their offerings, including coverage amounts, premiums, and any additional benefits or riders. Read the fine print of the policy documents carefully to understand the details, exclusions, and the free-look period during which you can cancel the policy.

Finally, opt for a reputable company with a high claim settlement ratio, indicating their reliability in settling claims. By considering these factors, you can make an informed decision when choosing a life insurance policy and company that aligns with your requirements and provides the best value.

Filling out an application

Filling out the application is the final step in getting life insurance for your parents. Here's what you need to know:

Consent and Insurable Interest

Firstly, you will need your parent's consent to take out a policy on them. They will need to be legally competent to provide such consent and will have to sign the application. This is a legal requirement and is in place to protect the insured person.

You will also need to prove that you have an "insurable interest", which means that you would experience financial hardship after the person's death. This could include funeral services, burial/cremation costs, end-of-life medical expenses, inheriting your parents' house and their mortgage, debts you co-signed with your parents, or expenses related to caring for a surviving parent.

Information Required

During the application, you will need to provide your parent's Social Security number, name, and address. You may also need to provide information on how their death would financially impact you.

Medical Exam

Depending on the insurance company and the type of insurance plan, your parent may be required to undergo a medical exam. The results of this exam will be shared with the insurance company, which will use the information to determine your insurance options.

Application Questions

Your parent will need to answer application questions on their own. These will likely cover their medical history and certain personal information regarding their assets, finances, etc.

Policy Owner

The person paying the insurance premiums is usually the owner of the policy. However, your circumstances will determine who is in the best position to own the policy. Your insurance agent can help you choose the best owner and walk you through the options available.

Accessibility

Make sure the owner understands their responsibility and is willing to be the point of contact with the insurance provider. It is important that the policy is easily accessible.

Frequently asked questions