Can You Buy Life Insurance for Your Parents?

Individuals often purchase life insurance for their parents to provide financial protection and security. This planning addresses potential future expenses, such as end-of-life costs or ongoing financial support. Life insurance ensures resources are available when needed.

Understanding Insurable Interest

A fundamental concept in life insurance is “insurable interest,” requiring a legitimate financial or emotional stake in the insured individual’s continued life. This legal requirement prevents speculative purchases or moral hazard. Without it, an insurance contract could be void.

For a child purchasing a policy on a parent, insurable interest is typically established through financial dependency or responsibility, such as covering care, medical bills, or final expenses. It can also stem from a close familial relationship where there would be an emotional impact from the loss. This interest must exist at the time the policy is purchased.

The Application and Policy Ownership Process

Purchasing life insurance on a parent involves several steps and defined roles. The parent, as the insured, must provide consent and typically sign application forms, confirming their agreement. This ensures transparency and prevents policies from being taken out without their knowledge or approval.

A medical examination is often part of the underwriting process for the parent, as their health significantly influences insurability and premium rates. This exam typically includes a review of medical history, lifestyle habits, and sometimes samples. This information helps the insurance company assess risk and determine coverage terms.

A life insurance policy defines distinct roles: the applicant, the insured, the owner, and the beneficiary. The child typically acts as the applicant, initiating the process and often paying premiums. The parent is the insured, the individual whose life is covered. The child can also be the policy owner, controlling the policy, including changing beneficiaries or accessing cash value. The beneficiary receives the death benefit when the insured passes away.

Policy ownership can be structured in various ways; the child can own the policy, or the parent might retain ownership. If the child owns it, they maintain control and responsibilities, such as premium payments. If the parent owns it, they have control, even if the child pays premiums. The application is submitted through an agent or online, and after underwriting review, the policy is issued, declined, or offered with modified terms.

Financial and Tax Considerations

The financial aspects of a life insurance policy on a parent involve premium payments and potential tax implications. Premiums, typically paid by the child, are determined by factors including the parent’s age, health, policy type (term or permanent), and coverage amount. Younger, healthier individuals generally have lower premiums.

If a permanent life insurance policy is chosen, a portion of the premium contributes to a cash value component that grows over time. This cash value can be accessed by the policy owner through withdrawals or loans, providing funds during the parent’s lifetime. However, accessing cash value can reduce the death benefit. The death benefit paid to the beneficiary is generally exempt from federal income tax.

Gift tax considerations may arise if the child pays premiums on a parent-owned policy, or if another person is the beneficiary. The Internal Revenue Service (IRS) provides an annual gift tax exclusion, which for 2025 is $19,000 per recipient. Gifts exceeding this amount may require filing a gift tax return, though they typically count against the higher lifetime gift tax exemption.