We often think about buying life insurance for ourselves, our spouses or our children, but sometimes you may find yourself in a situation where you worry about a parent and the costs that may arise from their death. In addition, the development of life insurance with living benefits creates a completely new financial planning strategy to manage the costs of long-term care. <! – ->
But buying life insurance from a parent requires you to follow certain rules and can often require a slightly more involved application process. So with our many years of experience working with clients that span all sorts of unique situations (including the need to purchase a life insurance policy from a parent), we can help you provide a roadmap for navigating this life insurance area.
Can I Buy Life Insurance on My Mom or Dad?
The short answer is yes, but there are many qualifications for this short answer. First of all, keep in mind that whenever you want to buy life insurance, you must be able to prove to the insurance company's insurance department that you have an insurable interest in the matter. This means that you must be able to prove that you are facing a financial loss if the proposed insured dies.
This often sounds much more complicated than it really is. Most people experience real financial loss when their parents pass away. If nothing else, you will lose the assets your parents had that go towards the cost of a funeral. For some people, it may not be worth insuring this type of loss; others may not see it the same way. <! – ->
The important thing to understand is that you must identify an insurable interest and be ready and willing to explain the insurable interest of an insurance company if / when you chose to apply for life insurance.
How do I buy life insurance from a parent?
Applying for a life insurance policy that you buy from a parent is similar to the application process that you would go through if you bought life insurance policy on yourself. The biggest difference is that you will act as the owner and (probably) payer of the policy. You will not be insured under the insurance. This means that none of the health issues in the application apply to you. These questions apply instead of your parent. Your parent undergoes a health examination / screening for the life insurance application (if applicable).
But there are two important points you need to make sure you address when applying for life insurance in this way. These two points apply to all life insurance applications, but you may not have paid much attention to them when you applied for life insurance because the way they do not pay was less important than in a situation where the insurance owner and insurance are different. <! – ->
First you have the opportunity to name a contingent owner of the policy. If you do not choose one, the insured will normally be the conditional owner. This is okay if mom or dad are willing to take ownership of the insurance and pay the premiums should you die. But this can put your loved ones in a sticky situation if mom or dad has experienced reduced mental capacity in old age and you die unexpectedly. It is wise to have a backup plan for the possibility that you will kill your parents in advance. Even if it is unlikely, it is never impossible.
Secondly, you need to pay extra attention to the name of the recipient in this case. Because the owner and the insured are different people, you do not want another person by name or entity to be the recipient of this life insurance policy. If you do this, you will create a Goodman triangle and the death benefit will be subject to gift taxes.
Linked to the recipient discussion, if you have siblings, it may be tempting to name them co-recipients, but this is a bad idea because part of the death benefit will meet the Goodman Triangle definition.
There is a subtle but important third point to make with this information. It is usually best to be the owner and beneficiary of an insurance policy in this situation (ie where you buy life insurance from your parents). However, you may be tempted to name a contingent holder other than the conditional recipient. If you die, you create a Goodman triangle.
What is the best life insurance policy to buy for my parents?
The best type of life insurance for your parents is highly dependent on the circumstances. If the potential loss you are trying to insure against is temporary and mom or dad is still young enough to qualify for life insurance, it may be an option. Understand only the temporary nature of the term life insurance.
Most purchases for life insurance at this stage in life are either full life insurance or universal life insurance. Deciding specifically between these two types of life insurance policies can be complicated and is usually best consulted with the guidance of a trained life insurance person. That said, full life insurance often comes into play when there is a desire to have access to some of the premiums paid as cash you can use in an emergency. Universal life insurance usually shines brightest when the only focus is permanent death benefit without zero desire for the policy to accumulate cash value. There is a special type of universal life insurance for this circumstance. It has many different names, but most often you see Guaranteed universal life insurance .
The above is just an introductory guide. There are many shades of gray and I do not want you to walk away from this article and think, for example, that your desire to accumulate cash value with such a policy always means that you should seek lifelong insurance.