By James Tobin
LIHD Difficulty Rating
If you are in the market for, or simply researching, life insurance for your parents, you have landed in a good place. This article will address the major concerns involved in buying life insurance for your parents, including amount of coverage, cost, and underwriting.
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The first step in buying life insurance for your parents is consent. Your will not be able to insure your parents (or anyone else other than your minor children) without the insured approval.
Part of the consent conversation should revolve around the goal of the policy. Is it meant to simply cover "final expenses" like funerals or is it meant to leverage your parents relative good health into a legacy for the family?
The answer to that question, along with age, health and financial position , will dictate the type of policy you will be able to obtain.
If your parent has significant health concerns, we advise you to use the customized quote tool, as it will make an accurate quote much more likely. If you are considering a legacy policy, this post will serve as a road map for the process.
Should you have any questions, please do not hesitate to call or send over an email.
If your parent is over the age of 75, in poor health , or you are only interested in funeral expenses, your options will be limited to so called "final expense" policies.
These policies are either simplified issue or guaranteed issue life insurance whole life policies. The simplified issue policy benefit amounts are generally less than $50,000 and underwriting is done without a medical exam.
Underwriting, in simplified cases generally consists of application questions that would deny or "knock out" the application, a computer check on the prescriptions being taken, and in some cases a telephone call with the insurance carrier. These policies are usually approved at the point of sale or within 48 hrs.
Guaranteed policies have no "knock out" questions, however, they are more expensive and only pay out if the insured lives through the "graded" period of two or three years (depending on the carrier). These policies are heavily advertised on radio and television.
Policies designed for leaving a legacy to the family are generally limited to insureds under the age of 75 in good health. These policies, in the form of whole life, universal life, or term insurance*, can have substantial benefit amounts (subject to financial underwriting). As such, advanced age makes good health imperative to affordability. Policies that are not graded as standard or better, so called "table rated policies", would be difficult to provide any leverage if approved at all.
* Term insurance is meant for a temporary need and may not considered appropriate for final expense or legacy planning.
The amount of insurance to be taken out has multiple components to be considered. In the case of funeral expense policies the major concern is budgetary. There is no point in extending yourself beyond what is affordable, as the policy will simply wind up lapsing.
As a general rule, funeral expenses cost between five and fifteen thousand dollars depending on your geographical location. Consider contacting your local funeral home to get an idea on costs in your area.
With regard to policies intended to leave a legacy, budgetary concerns are in addition to financial underwriting and leverage calculations. Financial underwriting will consider if there is a legitimate insurable interest between the insured and the policy owner/payor. Additionally, the insured must have legitimate financial interests to justify the amount of insurance being requested.
With all the above listed caveats, there is no general cap on policies due to age. If the insured can qualify, and the payment/benefit makes sense, the sky is the limit.
The manner in which a life insurance policy is structured is very important from a tax perspective. In addition to the carrier a policy has three participants: the policy owner, the insured, and the policy beneficiary. If all three of these participants are different people, the policy falls into a tax issue known as Goodman's Triangle.
To avoid the Goodman trap in which the benefit payout to the beneficiary is viewed as a taxable gift from the policy owner, at least 2 points on the triangle should be the same person (or a irrevocable life insurance trust).
In the context of this article, a common mistake regarding Goodman is for grown children to buy insurance on their parents and make their children (the insureds grand kids), the beneficiary.
A good portion of this site is dedicated to educating the public about the value of using an independent agent when shopping for life insurance. The reason for this is that different carriers have different appetites for specific risks.
So, if you use a "captive" agent who doesn't have access to a multitude of carriers (50+ in the case of the Life Insurance Help Desk), you will likely get "shoe-horned" into a policy that is not the best for your unique situation.
For example if the parent you are trying to set up a legacy policy with has high cholesterol or had a heart attack, it would be very important that the application be sent to a carrier that has a history of looking most favorably on such pre-existing conditions.
For an in depth look at how using an independent agent can save you tens of thousands of dollars over the life of a policy please see this post about obtaining a 2 million dollar policy.
Thank you for visiting the Life Insurance Help Desk to research buing life insurance for your parents. The next step in the process depends on the health of your parent, if they are in excellent health you can simply use a quote tool on the site (this link will explain the tool if you are interested).
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Jim Tobin is the owner of Life Insurance Help Desk, a Fairfield County, CT. life insurance agency. You can find him on LinkedIn and Facebook. Over the past 10 years, Jim has used his CFP-financial planning designation to help individuals with their life insurance needs. In addition to working with life insurance clients, Jim teaches ESL classes in his spare time. He resides with his beautiful wife Nicole and the 3 cats that rule their lives..
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