Why Buying Life Insurance for Your Parents Can Make Financial Sense
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If your parents don't have an insurance policy or the funds to pay their own way in their later years, you can buy life insurance for your them, assuming they’re on board and can qualify for coverage.
Providing financial help for your parents up to and after their death can be a challenge, and life insurance is one way to potentially recoup some of the money you’ve spent on their care or to help pay for final arrangements like a funeral. Some policies allow you to use the benefits before their death under certain circumstances.
You’ll need to work with your parents to find the right coverage for their situation.
» MORE: Best life insurance for seniors
The benefits of buying life insurance for your parents
An AARP survey published in January 2020 found that 42% of adults ages 40 to 64 expect to provide regular financial support for their parents. Many are part of “the sandwich generation,” buying groceries or paying rent for their parents while also raising their own kids or covering expenses for their adult children.
In some cases, a life insurance policy can help offset the costs of your parents' care. If you started saving for your parents’ end-of-life expenses today with a savings account or the stock market, it could take decades to accrue the same amount of money you could get from a life insurance payout.
There are other reasons to explore life insurance for your parents besides making up for lost time. You might lose income if you have to take time off work to care for them. You might want to avoid selling their house to repay their mortgage debt. Or your finances may be intertwined with a co-signed loan.
Essentially, if you expect to be financially stretched by your parents' costs toward the end of their lives, it’s worth looking into life insurance for them. Even if they already have a policy, you can get another one to help supplement their financial needs as they age and use it to pay for expenses after they die.
Working together to buy life insurance
Buying your parents a policy isn’t like getting them a surprise birthday gift. To buy life insurance for someone else, you need their consent.
This means your parents will have to agree to become insured. They may have to take a life insurance medical exam as part of the process as well.
The cost of their policy isn't affected by who pays the premiums. But you can shop around online to compare life insurance quotes and get the best deal.
» MORE: Average life insurance rates
What type of policy is best?
When you and your parents realize they need life insurance, it’s smart to move quickly to find the right type of life insurance. The younger and healthier your parents are when applying for coverage, the cheaper their rates are likely to be. And most companies won't issue policies to people who’ve developed dementia or Alzheimer’s.
To simply cover funeral arrangements, consider burial insurance, a life insurance policy with a small death benefit that beneficiaries can use as needed. You can also buy funeral insurance, which sends payment directly to a funeral home for prearranged services.
Term life insurance can be a good choice if your parents need coverage only for specific years, such as the duration of a mortgage. Keep in mind that if a term life policy expires before your parent dies, no one receives a death benefit.
Permanent life insurance typically doesn’t expire. It also builds cash value over time, which may be helpful if you need to pull money out of the policy before your parents die to help cover bills. But premiums are typically much higher than for a term life plan. Plus, that cash value needs many years to accrue, so if you haven’t had the policy for long, the life insurance cash value is negligible.
Be sure the policy names you as the life insurance beneficiary. If you aren't named as the beneficiary, you won’t receive the death benefit.
Using accelerated death benefits
When shopping for life insurance for your parents, ask whether the plans offer accelerated death benefits. These benefits, which may cost extra, can sometimes help cover the costs of terminal illness, a life-threatening diagnosis or long-term care.
In essence, your parents can receive a tax-free advance of a portion of the death benefit in case of emergency, so you don’t have to dip into other assets to pay those costs.
Keep in mind that using accelerated death benefits will reduce the payout when your parents die. But if you’re buying life insurance for aging parents, you may be glad to have the option to use some of the funds rather than paying out of pocket.
Planning for long-term care
Buying life insurance for your parents is also an opportunity to think about long-term care benefits. Long-term care can be expensive: Median costs in 2021 were $4,500 a month for an assisted living facility and $7,908 a month for a semi-private nursing home room, according to Genworth’s 2021 Cost of Care survey.
If you’re interested in combining the benefits of life insurance with long-term care coverage, you have several options.
A long-term care rider added to a life insurance policy will pay a benefit if the insured person is unable to perform a certain number of activities of daily living such as eating, toileting, transferring, bathing, dressing and continence.
Riders can work in three different ways:
Long-term care benefits reduce the life insurance payout. This option essentially allows the insured to tap the death benefit amount to pay for long-term care. Once this amount has been spent, no more funds are available and there will be no payout when the person dies.
Long-term care coverage is a separate benefit. In this case, it doesn’t affect the life insurance payout or other policy benefits.
Long-term care benefits reduce the life insurance payout, but the rider also provides extra coverage for long-term care. For example, let’s say a policy has a $100,000 death benefit and a $200,000 long-term care rider. Once $100,000 has been paid out for long-term care, no more funds are available for a death benefit, but the policy will continue to pay long-term care benefits up to the $200,000 limit.
A hybrid insurance policy combines long-term care insurance with either life insurance or annuities. These policies allow more flexibility in long-term care benefits. They are commonly purchased with a single premium, though a couple of companies offer a policy with ongoing premiums.
You can exchange an existing life insurance policy for a hybrid policy using Section 1035 of the Internal Revenue Code. Please note that you should consult a qualified life insurance agent or long term care insurance agent to ensure that this is done properly.