Life insurance for parents

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Budding families need all the financial protection they can get. In most households, the high cost of living demands more than one income to sustain a comfortable lifestyle and lay a foundation for the future. When kids arrive, families need even greater financial security. When a young parent dies, it can throw the surviving family members into an emotional and financial tailspin. But life insurance can help offset the impact of a lost income, ensuring your family can continue comfortably after you’re gone.

If you already have your financial house in order, you also need to consider your parents’ future and how their lives might impact yours as they grow older. Long-term illnesses can wreak financial havoc. If your parents don’t have adequate assets, long-term care coverage or life insurance, you may need to step in to help. When planning your own financial future, also consider how your parents’ golden years might impact your life. Life insurance coverage helps safeguard your assets and is a great way to protect your parents should they rely on you in the future.

Why is life insurance important for parents?

Life insurance protects your assets and your family’s future when you die. Most families rely on two incomes, so when one spouse or partner dies the survivor can face financial hardship. And when children enter the picture, you must prepare a financial plan that helps them reach major milestones, like earning a college degree.

Life insurance can also cover funeral expenses and pay off medical debt a deceased person accumulated during a long illness. In short, when someone dies, it usually has a major financial impact on their surviving loved ones. Life insurance coverage is the best way to help your loved ones avoid a difficult financial transition in their time of grief.

Adult children must also consider the financial health of their aging parents. Parents do their best to prepare for retirement and build an inheritance for their children. But when serious illness strikes, even the best laid plans can lead to serious financial losses. If that happens in your family, you may need to help one or both of your parents financially or quit your job to care for them. Purchasing life insurance for a parent can help mitigate your financial losses.

It’s best for elderly parents to discuss their finances with their adult children. If your parents haven’t discussed their finances with you, gently get the conversation started, otherwise you may face unexpected financial losses in the future.

Buying life insurance for your parents

When an elderly spouse dies, the surviving spouse could lose income and face financial hardship. Likewise, a surviving spouse could lose health insurance following the death of a husband or wife. If an elderly parent needs long-term care, but doesn’t have adequate coverage, the bills can mount quickly, leaving a mountain of debt for the adult children to pay after both parents pass. The reasons an adult child might need to purchase life insurance for a parent are practically endless.

Ideally, parents will purchase adequate life insurance and long-term care insurance long before they need it. If you’re a young parent, now is the time to start considering both types of policies. Around 70% of Americans who reach 65 years of age need some type of long-term care, according to the American Association of Retired Persons, so early preparation can help prevent your surviving spouse or adult children from shouldering a financial burden.

If you’re in your 20s or 30s and have a spouse and children, you need life insurance coverage now. This need increases even more if you have a mortgage. Otherwise, your family can face financial hardship if you unexpectedly die before reaching your golden years. According to a New York Life survey, about 90% of people who need long-term care receive it in their home or an assisted living facility or nursing home. According to AARP, Medicare covers about 22% of all long-term care expenditures for seniors, while Medicaid pays about 43%. However, to qualify for Medicaid long-term care assistance, you must first exhaust assets such as bonds, checking accounts, savings and stocks, which can leave your kids with little or nothing to inherit. To avoid having to spend down your assets in later life, purchase a long-term care policy by age 40, when you can receive a more favorable premium, if you’re in good health.

Long-term care insurance is expensive, particularly if you’re over 40. According to Kiplinger, long-term care insurance premiums will increase by nearly $2 billion, through 2029, impacting almost 300,000 current policyholders. To forego the high cost of a standalone long-term care policy, consider adding a long-term care rider to an annuity or life insurance policy. Not all life insurance providers offer this type of rider and the benefits they provide vary. Some types of coverage provide per diem benefits, while others reimburse you for expenses that exceed a certain limit.

If you’re an adult child and foresee a future financial problem for one or more of your parents, you may need to take some action. For example, if your father earns a modest income and doesn’t have a life insurance policy, you may want to purchase one for him and make your mother the beneficiary, just in case he dies before she does. Or, if your parents rely heavily on your mother’s retirement benefits, you may need to purchase a policy for her to ensure your father can continue to live independently if she dies first.

When purchasing a life insurance policy for parents, estimate how much money they’ll need for long-term care and how much of their assets you’ll need to replace. For example, if you believe future nursing home care for your mother will require her to liquidate and spend $100,000 in assets, she’ll need a life insurance policy with at least a $100,000 death benefit. When shopping for life insurance for a parent, consider looking for a policy that includes an accelerated death benefit rider, which allows you to receive a tax-free advance to help pay for a terminal illness, long-term care or nursing home expenses.

You may also consider purchasing a life insurance policy for one or both of your parents that names you as a beneficiary. For instance, if you foresee a time when you will need to quit your job to care for one of your parents, you could end up facing your own financial burden. By purchasing a policy that pays the death benefit to you, you can recover some of your lost income or assets after the parent dies. To determine the face value of the life insurance policy, calculate how much money you will need to spend on your parents based on an estimated life expectancy. For instance, if you contribute $1,000 per month to your father’s care, and expect him to live another 10 years, you will need a life insurance policy with a $120,000 death benefit to account for inflation.

Insurance codes vary by state, but in most cases, you’ll need your parents’ consent to purchase a policy that covers them. If the insurer requires a medical exam, your mother or father likely will need to give consent before the assessment. To purchase life insurance for another person, you must have an insurable interest, which means the insured’s death will financially impact the beneficiary. Typically, an insurable interest would only apply to family members or a business partner.

The best types of life insurance policies for parents

The insurance market offers several types of life insurance policies, all of which provide a death benefit when the insured passes away.

Whole life:

Traditionally, parents buy whole life policies for themselves and often for their children. Whole life pays the face value of the policy, which you can choose. Over time, whole life policies build a cash value, which you can borrow against or cash out when you no longer need the coverage. Whole life policies don’t expire, as long as you continue to pay the premium, and often don’t require a medical examination if you’re under a specified age. But when you purchase a whole life policy, you can’t increase its face value down the line.

Universal life:

Universal life policies work like whole life policies, but with a few differences. With a whole life policy, the provider determines the amount of cash value your policy can build. But universal life policies build cash value based on a money market interest rate. Universal life also offers more flexibility as your life changes, allowing you to increase the face value of your policy later, provided you pass a medical exam.

Variable life:

Yet another modern version of whole life insurance, variable life policies offer a death benefit, plus an investment vehicle. However, with a variable life policy, you can choose to invest the cash value portion of your coverage in bonds, money market mutual funds or stocks. It’s a great way to increase the face value of your policy. However, if the investments you choose don’t perform well, it could result in a reduced death benefit.

Term life:

Over the past few decades term life policies have become increasingly popular for their low premiums. Term life policies pay a set death benefit, but don’t accumulate a cash value. And, term life policies only cover the insured for a predetermined amount of time. For example, you may purchase a 20-year, $250,000 term life policy. Some term life policies feature a locked-in rate for the entire term, while others allow the insurer to increase your premium as you age. Many policies allow you to renew them at the end of the term, without taking another medical examination. However, you’ll pay a higher rate, based on your age at renewal. Also, insurance carriers only offer term life coverage up to a certain age, usually around 80.

Choosing the best type of coverage will depend on your circumstances. Purchasing a whole life, universal life or variable life policy while you’re young will provide you a lifetime of protection, while offering an investment vehicle, which you can use when needed or allow to build a higher death benefit. Generally, though, these policies are considerably higher in cost compared to term life policies.

Buying life insurance isn’t an either-or proposition. You can purchase a cash-value policy when you’re young and single, then add a term life policy when you get married and have kids. Parents often purchase 20- or 30-year term life policies just in case they die before their children reach adulthood and independence.

If you want to buy life insurance for your parents, it’s best to purchase their policies while they’re still relatively young and healthy.

Frequently asked questions

Can my parent get a life insurance policy with a preexisting condition?

It depends. Serious conditions such as dementia, heart disease and osteoporosis can disqualify a person from obtaining life insurance. Some types of life insurance policies require applicants to take a qualifying medical exam. And folks over 50 years of age typically must take a medical exam for all types of life insurance coverage.

What type of life insurance policy should I purchase if I only need coverage for a few years?

Term life insurance provides coverage for a fixed term, like 10 to 30 years. If the insured person dies during the specified term, the policy pays the full value. Many term life policies also allow you to renew the coverage at the end of the term, at a new rate, based on your age.

Will my parent’s life insurance policy cover long-term care expenses?

It depends. Some life insurance policies include an accelerated death benefit rider, which the policyholder can use to pay for a serious illness or long-term care. Even if your parent’s policy doesn’t have an ADB rider, you can use the death benefit to pay off long-term care expenses or reimburse their estate for assets used to pay for their care after they pass away.

Do I need to get my parents’ permission to buy them life insurance policies?

Insurance codes vary by state, but in most cases, you’ll need your parents’ consent to buy them life insurance coverage.