Life insurance is a valuable tool that can help protect your loved ones financially when you pass. However, while most individuals will shop around for policies for themselves, sometimes it’s necessary to get a plan for someone else.
In this article, we’re going to discuss the value of getting life insurance for your parents. We’ll go over the various reasons you might need a policy on them, and which options are available. Knowing these details now can save you a lot of money in the long run, both in premiums and out-of-pocket expenses.
Why Should I Buy Life Insurance for My Parents?
Chances are that your parents may have life insurance policies on themselves that will pay out to each other when they die. In most states, spouses have to name each other on a life insurance policy, or they might decide to be co-owners of the same policy. Then, once both parents die, any death benefit would pass onto their beneficiaries, which might be their children or grandchildren.
In some cases, however, parents may not have a policy, or they might have term insurance that will mature before they die. It can be a good idea for you to buy a policy to cover them in those instances. Here are some top reasons why buying life insurance for your parents might be a smart move.
You Can Afford Premium Payments
If your parents are already retired, they may not have as much disposable income. So, trying to pay for an expensive life insurance policy might not be feasible. The older one gets, the higher the premium rates are for any kind of insurance.
Instead, you can be the owner of the policy and make these payments on behalf of your parents. This way, they get the coverage they want without the monthly bill. With some plans, the rates can go up as your parents age, so having you as the owner can help alleviate any rising payments.
Your Parents Have Outstanding Debts
One thing to keep in mind is that most debt doesn’t pass from parent to child. So, if your parents have outstanding balances, such as credit cards or a mortgage, you won’t become liable for it. However, any joint accounts will become the responsibility of the remaining spouse.
In this case, buying a policy on your parents can be a good idea so that the surviving parent can pay off any remaining balances. However, depending on how you set up the policy, there can be tax implications, which we’ll get into later in the article.
You Want to Take Over Property and Other Assets
If your parents are still paying off a home mortgage, that debt won’t automatically pass onto you. Instead, the bank can claim ownership of the property and sell it off to someone else.
However, if you don’t want that to happen, a life insurance policy can help you pay off the remaining balance so that you will own the house. Even if you plan on selling it shortly after that, you will maintain control, rather than the bank.
This process can also help your parents leave a more substantial death benefit without having to pay higher premiums. Let’s say that there’s $30,000 left on the mortgage, and the house is worth $400,000 on the market.
You can pay for a smaller plan with a $30,000 death benefit, and then use that to pay off the mortgage. Then, once the house sells, you will get the proceeds.
You might also have sentimental reasons for taking over your parent’s property. If you like the idea of living in your childhood home, it’s a good idea to have the policy to cover the remaining mortgage balance. Also, if your parents have paid off most of the mortgage, it seems unfair to let the bank benefit from all of their hard work.
This strategy also works with other assets, such as boats, cars, and anything else for which your parents still owe money. This way, the item can pass onto you without any outstanding debt.
You Want to Cover End-of-Life Expenses
The average funeral in the U.S. is roughly $7,000, but the cost can be much higher, depending on the last wishes of your parents. Also, keep in mind that the total price is for one individual, so you’ll have to cover both parents’ funeral expenses when they’re gone.
Even a modest funeral can set you back several thousand dollars, and if you don’t have that kind of money, it could put you into debt. So, buying a life insurance policy can help alleviate this burden.
You Want to Cover Medical Bills
While most life insurance policies provide a death benefit, some plans will also include living benefits. This kind of coverage is designed to pay out if the insured gets injured or disabled. For example, if one of your parents becomes hospitalized or cannot function normally, these policies can help cover medical expenses.
One thing to keep in mind is that living benefits can be highly expensive if your parents are already over 60. However, your premiums will likely be lower than any bills you get from the hospital, so it might still be worth it.
Fortunately, as with other types of debt, medical debt doesn’t pass onto children or spouses. So, if one parent dies with an outstanding balance, you or your surviving parent doesn’t have to repay it.
Top Considerations When Buying Life Insurance for Parents
Once you determine the reason behind buying a policy, you need to make sure that you find the right coverage to fit your parents’ needs. Here are some crucial factors to consider before finalizing any details.
Talk to Your Parents
Discussing life insurance can be challenging for some people, particularly between children and their parents. However, this is a necessary conversation.
First, your parents may already have policies in place, so you don’t have to buy coverage at all. Second, you will need their permission to name them as the insured, so you can’t get a plan without their input. Finally, this conversation can help determine the right amount of coverage necessary.
For example, let’s say that you want to buy your parents’ house when they’re gone. You’ll need to know how much is left on the mortgage and how quickly they can pay it off.
So, in this example, let’s pretend that it will take another 10 years to own the house free and clear. This means you can buy a 10-year term policy with a death benefit that covers the remaining balance. If neither parent dies before the mortgage is repaid, you can stop paying for the insurance, or buy a different policy like burial insurance.
Another reason to talk to your parents is to determine what kind of funeral or memorial service they want. This way, you can budget accordingly and buy enough coverage to fulfill their requests. Otherwise, you might pay too much or too little for their funeral because you didn’t know what they wanted.
If you have any siblings, it’s also a good idea to discuss any options with them. For example, they may want to assume ownership of property, or they may want to help pay for life insurance premiums. Overall, the more you can talk about various elements of final expense planning, the better prepared everyone can be when the time comes.
In most cases, a life insurance death benefit is treated as untaxed income. However, when buying a policy for someone else, you might have to pay taxes. Here’s a quick breakdown of how this process works.
There are always three individuals (or more) listed on a life insurance policy: the policy owner, the insured, and the beneficiary. In most cases, the insured and the policyholder are the same person. However, in this instance, you are the owner and your parent is the insured.
If a third person is named as the beneficiary – such as your child – then you will have to pay taxes on the death benefit. The reason you will owe the IRS is that you’re the one who was paying for the plan. The IRS considers the death benefit a gift because you’re not the recipient.
So, if you want the money to transfer to a third party, it’s better to name yourself as the beneficiary and put the funds into a trust. This way, you can avoid taxes and pass the money along smoothly. Be sure to talk to a financial advisor or attorney about setting up a trust, particularly if your child is under 18 when it happens.
Choose a Policy Sooner Rather Than Later
The older your parents get, the harder it will be to get good coverage. Usually, once someone is over 65, they cannot qualify for preferred rates. However, if your parents are in excellent health, preferred plans may still be an option, depending on the company you choose.
While it might seem too early to discuss plans for when your parents are gone, planning now can save a lot of time, energy and money in the future. For example, if you choose burial insurance to cover end-of-life expenses, you might be able to pay it off before your parents die. This way, you no longer have to pay monthly premiums, but the coverage is still guaranteed.
Even if there are many variables to consider (i.e., how much debt will remain), it’s still a good idea to buy a policy. It’s much easier to adjust the details of a life insurance plan than to buy a new one.
What Kind of Life Insurance Can I Get For My Parents?
When choosing life insurance for your parents, it’s always good to compare as many policies as possible. Each insurance company has its own rules regarding coverage options, so don’t assume that they are all identical. For example, one insurer may specialize in plans for individuals over 65, while others may not have policies for them at all.
While the details will differ between insurance providers, here are the basic types of plans you can buy for your parents.
Term Life Insurance
In some cases, a term policy may be the best option. It’s the most affordable type of coverage, and it’s the easiest to understand. Also, every insurer offers some form of term life insurance, so it’s more straightforward to find the right options.
Term policies are designed like this: you choose a coverage amount (i.e., $50,000) and a policy term (i.e., 10 years). As long as you pay the premiums each month, the plan is active. Once the term expires, you no longer have coverage. Also, your rates are locked in for the duration of the term, so they’ll never increase for any reason.
Term insurance for parents is ideal for situations where you want to assume property or debt that they have yet to pay off. If they die within the term, you can repay any outstanding balances quickly and easily. Also, if there is money left over, you can use those funds to cover any funeral expenses.
Whole Life Insurance
If you want to cover your parents for the long term and build cash value, then whole life insurance can be a good option. However, in most cases, it’s better to take a policy out on yourself since the cash value will build for longer.
One of the most significant problems with whole life insurance for your parents is that the premiums will increase as they get older. So, the longer you cover them, the more you’ll have to pay. This option is ideal if you want a higher death benefit or you want your parents to access funds while they’re still alive.
This type of coverage is designed specifically to cover the costs of funerals and burial services. These policies generally have a lower death benefit and higher premium costs. However, if you buy burial insurance early, you can get preferred rates and potentially pay off the death benefit before your parents die.
Another thing to consider with burial insurance is that there are often “guaranteed acceptance” plans. We don’t advise getting one of these policies unless absolutely necessary.
Guaranteed acceptance insurance is much pricier than any alternative, so you will pay hundreds of dollars each month. However, if your parents have a terminal illness or are over 80, these plans may be your only option.
Burial insurance for parents is an excellent choice if your primary concern is paying for funeral and memorial expenses. Fortunately, the money can be used for anything, so any remaining balance will be yours to keep.
Contact NextGen Life Insurance Today
Buying life insurance for your parents can be challenging, but we make it simple. We’ll help you compare plans and rates to ensure that you and your parents get the right coverage. Contact us to find out how we can assist you.