How to Put Life Insurance on Your Parents

Securing life insurance for parents is a common financial consideration for adult children. This process involves specific legal and financial requirements, including consent and financial relationships, to ensure all parties align with the policy’s purpose.

Essential Prerequisites

Obtaining a life insurance policy on a parent requires two foundational requirements: explicit parental consent and demonstrating an insurable interest. Without these, an application will not be approved. These requirements prevent fraudulent activity and ensure a legitimate financial relationship.

Parental Consent

Parental consent is legally mandated. The parent whose life is being insured must provide informed permission and sign the insurance application. This signature confirms their agreement to the policy terms, including any health questions or medical examinations.

Insurable Interest

Insurable interest is the financial relationship between the policy owner and the insured parent. It means the policy owner would experience a financial loss upon the death of the insured. Examples include responsibility for funeral costs, outstanding debts, or future care costs. For instance, if an adult child has co-signed a loan or provides financial support, insurable interest is established. Proving insurable interest is a legal requirement, not merely an insurance company stipulation.

Selecting an Appropriate Policy

Once consent and insurable interest are established, choose a suitable life insurance policy. Understanding the distinctions between policy types is important for an informed decision that aligns with the parents’ circumstances and coverage purpose.

Term Life Insurance

Life insurance policies fall into two main categories: term life and permanent life insurance. Term life provides coverage for a specific period (e.g., 10, 20, or 30 years) and offers a death benefit if the insured passes away within that term. It is generally more affordable than permanent options and suitable for specific financial obligations. Coverage ends when the term expires unless renewed, which can lead to higher premiums.

Permanent Life Insurance

Permanent life insurance, including whole life and universal life, provides lifelong coverage as long as premiums are paid. These policies have a cash value component that grows tax-deferred and can be accessed through withdrawals or loans. Premiums for permanent policies are generally higher than term policies but remain level.

Options for Older Applicants

For older applicants, specific policy options cater to their needs. Guaranteed issue policies do not require a medical exam or extensive health questionnaires, making them accessible for individuals with health issues. These policies come with higher premiums, lower coverage amounts (e.g., up to $30,000), and a waiting period (often 2-3 years) before the full death benefit is paid for non-accidental deaths. If death occurs during this period, beneficiaries receive a refund of premiums paid. Final expense insurance, also known as burial insurance, is a whole life policy designed to cover end-of-life costs. These policies feature simplified underwriting with no medical exam, focusing on health questions, and offer quick approval.

Navigating the Application and Underwriting

Once a policy type is chosen, the next phase involves the application and underwriting process, which determines eligibility and premium rates. The insurer evaluates the risk, influencing the policy’s cost and terms.

Information Gathering

Gathering necessary information is essential. The application requires personal details for both the policy owner and the insured parent, including Social Security numbers. Medical history, lifestyle habits, and financial information of the insured parent are requested. Details about intended beneficiaries are also needed.

Application Completion

The parent whose life is being insured must sign the application to confirm consent and accuracy of information. This signature is a legal acknowledgment of their participation.

Medical Examination

For many policies, a medical examination of the insured parent is a standard requirement. This exam includes vital signs, height, weight, and collection of blood and urine samples to assess health. Some policies, like guaranteed issue or simplified issue, may waive the medical exam but require health-related questions.

Underwriting Process

The underwriting process follows application submission and medical exams. Insurers review all collected information, including the application, medical exam results, medical records, and reports from databases like the Medical Information Bureau (MIB). Underwriters assess the applicant’s risk based on age, health, lifestyle, and financial status. This review determines if coverage will be offered, the premium rate, and specific policy terms.

Policy Ownership and Premiums

The policy owner controls the policy, including changes, beneficiary naming, and premium payments. While the adult child often owns and pays for the policy, the parent can also be the owner. If the child owns and pays, they typically control it and receive the death benefit directly as the beneficiary. Life insurance death benefits are generally not subject to federal income tax for beneficiaries. However, interest earned if the payout is held by the insurer, or if policy proceeds are included in a taxable estate, could be subject to taxation.

Policy Issuance

Upon approval, the insurer issues policy documents. Coverage becomes effective once the initial premium is paid. Review these documents to ensure all terms, conditions, and beneficiary designations are accurate and align with the policy owner’s intentions.