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As an adult, planning ahead for when your parents pass on is a sad but necessary part of life. Without a plan, this sad situation can also turn into an extremely expensive one. A life insurance policy could be one way to help prepare for these costs.
You might wonder whether you can take matters into your own hands and buy life insurance for your parents to help when that time comes. It is possible to set a policy up yourself, but only if you meet certain conditions. Here are some things to consider.
Why Should You Consider Life Insurance for Your Parents?
In 2019, the median cost of a funeral plus burial was $7,640, according to the National Funeral Directors Association. You may need to cover this cost when your parents die. You may also need to pay for other costs such as unpaid medical bills, taxes and legal fees to process their estate. A life insurance policy could help cover these future costs so you don't have to.
In addition, if both your parents are alive, they may be relying on each other for income. For example, they may depend on collecting two Social Security checks. When one parent dies, the other will likely receive less money from Social Security. Life insurance could give the surviving parent money to potentially help maintain their lifestyle.
A life insurance policy could also help your parents leave an inheritance for your family. For instance, if your parents have expressed interest in helping their grandchildren go to college or buy their first home, buying them a life insurance policy might potentially help them accomplish that goal.
How Do You Buy Life Insurance for Your Parents?
You can't just buy life insurance policy on any random stranger. The rules state you need an insurable interest on someone to buy coverage. This means you would be financially impacted by their death. As an adult child who would cover the final expenses of your parents, you likely meet this requirement.
However, as part of the application, you may need your parents' consent to set up coverage. They would likely need to sign the application and accept the policy as the insured person, even if you're paying for the coverage. Beyond that, your parents may also need to pass medical underwriting to qualify for some types of life insurance.
If you have any questions about how to set up a policy on another person, consider meeting with a financial representative or a legal expert first. They may be able to help you decide whether you or your parent should own the policy.
What Are the Types of Life Insurance?
If you think a life insurance policy could be a good fit for your parents, you have a few different options. Life insurance comes either as term or permanent coverage.
- Term life insurance is temporary and has a set expiration date. While term life insurance can be less expensive, there is also a risk that your parents will outlive the policy expiration date and lose their coverage.
- Permanent life insurance can last their entire lives, provided that you keep paying the premiums. Those premiums could be more expensive than a term policy, though. Two common types of permanent life insurance are whole life insurance and universal life insurance.
What's the Right Amount of Life Insurance for Your Parents?
Besides the type of life insurance, you'll also want to consider how much life insurance to buy. You likely want the death benefit to be able to help cover costs, but buying too much can lead to more expensive premiums.
One method to consider is to make a list of all the expenses you expect to cover for your parents and then buy a policy for that amount. You could also meet with a financial representative and ask them to help you with a financial needs analysis. This is a more detailed calculation to determine the amount of life insurance you purchase for your parents, based on their future expected needs.
As you go through your research, consider giving your parents regular updates, as they will likely need to approve the life insurance policy you purchase. While it may feel like an uncomfortable topic, chances are that your parents will appreciate that you're thinking of their future, along with how you can continue supporting the rest of your loved ones.