Getting a policy on your parent may sound as simple as getting a policy for yourself, but things can get a little complicated if you’re not careful.
In this guide, you’ll learn which steps to take and what to watch out for along the way.
Determining Your Insurable Interest
As we mentioned previously, insurable interest means that you would suffer a financial loss if your parent were to pass away.
At a basic level, this could just be that you’re on the hook for final expenses like the cost of the funeral and burial. But there are other situations in which your insurable interest — and therefore, the amount of coverage you’d qualify for — is higher.
For example, let’s say you’re expecting to inherit your parent’s home when they pass away and it has a mortgage on it. You can consider the amount of the mortgage as insurable interest and request a policy to cover that amount.
Alternatively, if you and your parent co-signed on a loan together, you’re both legally responsible for the debt, so you can consider the remaining loan balance as insurable interest.
In other words, don’t expect to get rich off of a life insurance policy on your parents. You must be able to prove to the insurance company that you have an insurable interest in the amount you’re requesting.
Proving insurable interest isn’t the only requirement to buy insurance on your parent. You also need to get their consent.
In fact, it would be hard to buy a policy without consent because, depending on the amount you’re requesting, your parent might need to undergo a medical exam. Even if they don’t, they’ll need to sign the policy application as the insured.
If your parent doesn’t agree to the policy, you’ll need to wait until you can convince them otherwise before you proceed. And remember, forging your parent’s signature to get around the consent requirement is considered insurance fraud, and has steep penalties.
Finding the Right Policy
Term insurance is the cheapest form of life insurance, so it may seem like a no-brainer. But term life insurance isn’t available for all ages — the maximum age can depend on the insurance company. Also, you’ll need to consider your parent’s life expectancy.
For example, let’s say your parent can only qualify for a 10-year term policy but you expect your parent to live longer than that. In this situation, you might want to opt for a permanent life insurance policy, such as whole life, instead.
Whole life insurance can be extremely expensive because of the cash-value component attached to it. But it guarantees coverage until age 100 or 121, depending on your preference.
However, since you typically only need life insurance for your parent for the death benefit, opt for the cheaper term coverage if you can.
The policy owner is the person who holds the rights to the life insurance contract. As the owner, you would get to choose — and potentially change later on — the beneficiary of the policy, and make any other necessary changes.
And if you opted for a whole life insurance policy, only the owner can access the policy’s cash value account.
Talk to your parent about who should be the owner of the policy. If you’re concerned about your parent becoming mentally incapacitated at some point in the future, it may be in both your best interests for you to be the owner.
Deciding Who Pays
Either you or your parent can pay the premiums on the policy. You’ll need to have a conversation about this part with your parent to determine the best way to proceed. If your parent agrees to pay, keep an eye on the policy to make sure they pay the premium each month.
You’ll typically get a grace period if your parent misses a payment, but if the policy isn’t paid up in time, the insurance company can cancel the policy, and you would be out of luck.
In most cases, life insurance proceeds are tax-free. But if you’re not careful, you could be on the hook for a gift tax.
The situation where taxes would apply is called the “Goodman rule,” named after a decades-old court case, Goodman v. Commissioner of the Internal Revenue Service.
According to the ruling, if the owner, insured and beneficiary are all different people, the IRS treats the death benefit payout as a taxable gift from the owner to the beneficiary. So, if you’re the owner, your parent is the insured and your spouse is the beneficiary, you might have to pay a federal gift tax on some or all of the death benefit.
To avoid the Goodman rule, make sure that either your parent is both the owner and the insured, or you’re both the owner and the beneficiary.
The Bottom Line
Buying life insurance for your parents might be a good idea, especially if you think you’ll run into financial issues when they pass away.
If you’re considering it, follow these steps to make sure you do the process right and avoid issues with non-payment and taxes along the way.