Buying Life Insurance for Your Parents

Life insurance policies can help provide financial peace of mind in case of one’s death. The best life insurance for parents can make up for income the deceased parent provided and pay for debts and future expenses. This guide will help you find the best life insurance companies for parents.

You might be asking yourself: Can I buy life insurance for my parents? The answer is yes, you can buy life insurance for your parents, as long as they agree to it. You cannot, however, take out a life insurance policy on your parents without their knowledge. You must get their consent, and they must personally sign the life insurance policy.

There are many reasons to get life insurance. Life insurance helps provide peace of mind for family members and loved ones. It is meant to help protect a family's financial future, replace lost income, and pay off debt and future expenses.

According to the Life Insurance Marketing and Research Association (LIMRA), if the primary wage earner in America passed away unexpectedly, 42% of families would face financial hardship in six months. Despite the importance of life insurance, only 52% of American adults own some form of life insurance coverage.

There are several types of life insurance coverages to consider. Learn more to see which one may be right for you.

Term life insurance

Term life insurance is the least costly, but only lasts a certain number of years, which is the term. As long as the premiums are paid, coverage continues until the end of the term, or until the covered parent passes away. If your parent outlives a term policy, the policy expires, and no benefit is paid out.

Permanent life insurance

Permanent life insurance, also known as whole life insurance, can provide coverage for your parents for life. Permanent policies are more expensive than term policies, but offer more benefits. Besides lifetime coverage, they offer a cash value component. As you pay your premiums, the policy accrues a "cash value," acting as an investment vehicle.

The cash grows tax deferred, like a 401(k) plan or individual retirement account (IRA). According to Consumer Reports, the average annual rate of return on a whole life policy is 1.5%. While that's a low growth rate, it does beat the interest rate on most banking products.

Guaranteed issue life insurance

Guaranteed issue life insurance is a policy that does not require a medical exam. The main benefit is that your parents can’t be turned down. This may be a great option if your parents have health problems and can’t qualify for a traditional policy. This option however is generally the most expensive and the death benefit is typically low.

Final expense life insurance

Final expense life insurance, also known as funeral insurance and burial insurance, is a permanent life insurance policy that typically pays for funeral, burial, and other immediate expenses after death. As long as you keep paying your premiums, the policy will not expire. Final expense insurance is usually easy to qualify for and doesn't require a medical exam. It does however generally require a medical questionnaire and demographic information. The amount ranges from a couple of thousand dollars to $35,000.

Each of these types of policies have their pros and cons. Choosing the right type of life insurance for your parents depends on your financial situation, age, health, and the type of coverage you want.

The current median life insurance coverage offered through work is only $20,000 or one year’s salary. With 22% of those insured believing they need more life insurance coverage, it is important to ensure there is enough life insurance to protect family and loved ones.

The amount of life insurance someone’s parents need depends on many different factors. For older parents, they may want to consider the cost of medical bills, funeral costs, and how much they want to leave their family members or estate. For younger parents, they will want to consider how much income or other support the insurance needs to replace for loved ones.

One rule of thumb is to multiply annual income by 10 and add it to the total amount of debt. For example, let’s say you have an annual salary of $50,000 and total debts of $250,000. Using this formula means multiplying the salary by 10 to get $500,000, then adding the $250,000 debt, which results in a $750,000 policy.

For a more individualized calculation, you can use the DIME formula. This involves adding up:

• Debt: Total outstanding bills plus the cost of final expenses
• Income: The number of years of income to replace (including the loss of labor a non-working spouse performs)
• Mortgage: The outstanding balance of a home mortgage
• Education: The estimated future education costs for children

The total amount is a good starting point to determine how much life insurance you need.

The cost of buying life insurance will depend on the type of insurance you buy, the policy terms, your parents’ health, as well as other factors. Premiums will be lower for parents who are younger and are in better health.

Here is an average breakdown of monthly costs for a 10-year $500,000 term policy for a 65 year old.

• Non-smoking female in average health: $148.75
• Non-smoking male in average health: $234.75

Here is an average breakdown of monthly costs for a whole life $500,000 policy for a 65 year old.

• Non-smoking female in average health: $2,241.12
• Non-smoking male in average health: $1,865.28

Tax considerations of buying life insurance for parents

Life insurance proceeds are generally tax free for the beneficiary. Regardless if you are paying for the premiums or your parents are, as the beneficiary, you will not pay taxes on the death benefit. There are some exceptions however.

Any interest earned on the death benefit is taxable. For example, if the death benefit was paid out in series of installments instead of a lump sum, any interest earned would be taxable. Parents may want the death benefit paid out over time to guarantee an income stream for their beneficiary over the course of the designated period.

Another exception is if the life insurance death benefit is paid out to an estate and the value exceeds federal and state exemptions. The 2022 federal estate tax exemption is $12,060,000 for individuals and $24,120,000 for couples. Federal estate taxes range from 18% to 40%. Twelve states and the District of Columbia also have an estate tax and six have an inheritance tax. State exemptions range from $1 million to $7 million and the tax rate can be as high as 20%.

If parents are primarily worried about funeral expenses, parents can pre-pay costs through a funeral home. They can also self-fund through their savings and investments so they can pay for the costs themselves. If your parents are still working, another alternative is for them to get life insurance through their employer.