If you’re like many adults, you may be helping your aging parents manage their finances. If not, you may become concerned with how prepared your parents are for retirement, long-term medical care, and estate planning.
Unfortunately, financial conversations between adult children and their parents do not happen often enough. One survey showed only 5 percent of retirees who responded “frequently” discussed financial matters with their families. About 46 percent never discuss them.
An unfortunate consequence of this trend is that seniors are often targeted by unscrupulous advisors. Retirees can be pressured into bad investments and unnecessary insurance products.
One way you can help your parents is to help them evaluate their need for life insurance. If you find they need new coverage or a policy to supplement their current coverage, you can also help them select the best coverage that meets their needs.
Assessing your parents’ life insurance needs is similar to the process you likely went through. The difference is that your parents likely don’t have the same financial situation as you do.
One of the first things to consider is whether there are people who depend on one or both of your parents’ current income. If one or both of your parents still work, then it’s likely a surviving parent will need to replace the income that would be lost if one parent dies.
You also need to consider whether or not the income stream will stop if one parent passes away. For example, if your parents are largely living off retirement account income, that money will continue to be available to your surviving parent or another beneficiary if one parent dies.
Another potential concern for seniors and retirees is debt. If one or both of your parents die with outstanding debts, chances are those will need to be repaid out of the remaining estate. Having life insurance can help pay off any balance left on a home mortgage and other debts.
If your parents do not have the aforementioned life insurance needs, they may just need a final expense policy. This is a type of life insurance that covers funeral expenses and other settlement costs.
Because they are older and potentially have health problems, your parents are going to pay more in premium than you will for your coverage.
Because of the cost of life insurance for older adults, it’s not advisable for your parents to buy whole life insurance. Whole life insurance is considerably more expensive than comparable term life insurance.
If your parents need life insurance to replace income or to repay debts, a term policy should be sufficient. The length of the term will depend on several factors; keep in mind that the shorter the term, the less they will pay in premium.
One way your parents can determine the right length of term is to estimate how much longer they plan to work. If they have 20 years until they retire, then a 20-year term may be sufficient.
They should also consider the length of time left on their debt payments, especially their mortgage. If they have 10 years left on their home payments, they might get by with a 10-year term policy.
If their only consideration for buying life insurance is to cover final expenses, then they should consider a final expense policy. This is a type of permanent life insurance that will last as long as the premiums are paid. It provides a minimal death benefit to cover funeral costs. But it offers the advantage of not requiring a medical exam to qualify. Your parents will only have to answer a few health-related questions.
If your parents can’t qualify for term insurance or final expense insurance because of health issues, their last resort is to get a guaranteed issue life insurance policy. This is a type of policy that your parents qualify for regardless of health or other factors. Once they apply and pay the premium, they will be covered. Because of the lack of underwriting, this type of policy offers a minimal death benefit. The premium will also be higher than other types of insurance. But a guaranteed issue policy can provide enough to cover final expenses.
Most adult children are no longer financially dependent on their parents, save for a small loan here and there. Therefore, it’s uncommon for people to apply for and own life insurance coverage for their parents. But it does happen.
And, yes, it is possible to buy an insurance policy that insures your parents and names you and/or other family members as beneficiaries. But it’s not as simple to do as it is when you’re buying life insurance to protect a spouse or child.
Life insurance companies do not sell policies to just anybody who wants to cover another person. In situations where you are both the policyholder and the beneficiary of a policy that covers the life of another person, there has to be what is called insurable interest.
Insurable interest means that there is a legitimate financial reason for you to buy insurance on another person’s life. It can’t just be because you want a large sum of money. You must demonstrate a financial dependence on the person being covered, with evidence that their death will hurt you financially.
This is not easy to do for adults trying to buy life insurance for aging parents. Some scenarios in which it’s possible include:
- You want to ensure that funeral expenses and other settlement costs are covered and your parents can’t afford to pay life insurance premiums on their own.
- They are co-signers on a loan you are primarily responsible for repaying.
- Your parents provide you with free childcare.
- You’re living rent-free in your parents’ house and would like to be able to pay off the mortgage if they pass away.
- You are planning to take over a family business if your parents die and you need money to continue operations and/or to buy out siblings who would otherwise inherit shares of the company.
To avoid having to prove insurable interest in your parents, it’s best if they buy the coverage on themselves and name the appropriate beneficiaries.
Jack Wolstenholm is the head of content at Breeze.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.