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If your parents don't have an insurance policy or the funds to pay their own way in their later years, you can buy life insurance for your them, assuming they’re on board and can qualify for coverage.
Providing financial help for your parents up to and after their death can be a challenge, and life insurance is one way to potentially recoup some of the money you’ve spent on their care or to help pay for final arrangements like a funeral. Some policies allow you to use the benefits before their death under certain circ*mstances.
You’ll need to work with your parents to find the right coverage for their situation.
» MORE: Best life insurance for seniors
The benefits of buying life insurance for your parents
An AARP survey published in January 2020 found that 42% of adults ages 40 to 64 expect to provide regular financial support for their parents. Many are part of “the sandwich generation,” buying groceries or paying rent for their parents while also raising their own kids or covering expenses for their adult children.
In some cases, a life insurance policy can help offset the costs of your parents' care. If you started saving for your parents’ end-of-life expenses today with a savings account or the stock market, it could take decades to accrue the same amount of money you could get from a life insurance payout.
There are other reasons to explore life insurance for your parents besides making up for lost time. You might lose income if you have to take time off work to care for them. You might want to avoid selling their house to repay their mortgage debt. Or your finances may be intertwined with a co-signed loan.
Essentially, if you expect to be financially stretched by your parents' costs toward the end of their lives, it’s worth looking into life insurance for them. Even if they already have a policy, you can get another one to help supplement their financial needs as they age and use it to pay for expenses after they die.
» MORE: How much life insurance do I need?
Working together to buy life insurance
Buying your parents a policy isn’t like getting them a surprise birthday gift. To buy life insurance for someone else, you need their consent.
This means your parents will have to agree to become insured. They may have to take a life insurance medical exam as part of the process as well.
The cost of their policy isn't affected by who pays the premiums. But you can shop around online to compare life insurance quotes and get the best deal.
» MORE: Average life insurance rates
What type of policy is best?
When you and your parents realize they need life insurance, it’s smart to move quickly to find the right type of life insurance. The younger and healthier your parents are when applying for coverage, the cheaper their rates are likely to be. And most companies won't issue policies to people who’ve developed dementia or Alzheimer’s.
To simply cover funeral arrangements, consider burial insurance, a life insurance policy with a small death benefit that beneficiaries can use as needed. You can also buy funeral insurance, which sends payment directly to a funeral home for prearranged services.
Term life insurance can be a good choice if your parents need coverage only for specific years, such as the duration of a mortgage. Keep in mind that if a term life policy expires before your parent dies, no one receives a death benefit.
Permanent life insurance typically doesn’t expire. It also builds cash value over time, which may be helpful if you need to pull money out of the policy before your parents die to help cover bills. But premiums are typically much higher than for a term life plan. Plus, that cash value needs many years to accrue, so if you haven’t had the policy for long, the life insurance cash value is negligible.
» MORE: A guide to life insurance for seniors
🤓Nerdy Tip
Be sure the policy names you as the life insurance beneficiary. If you aren't named as the beneficiary, you won’t receive the death benefit.
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Using accelerated death benefits
When shopping for life insurance for your parents, ask whether the plans offer accelerated death benefits. These benefits, which may cost extra, can sometimes help cover the costs of terminal illness, a life-threatening diagnosis or long-term care.
In essence, your parents can receive a tax-free advance of a portion of the death benefit in case of emergency, so you don’t have to dip into other assets to pay those costs.
Keep in mind that using accelerated death benefits will reduce the payout when your parents die. But if you’re buying life insurance for aging parents, you may be glad to have the option to use some of the funds rather than paying out of pocket.
» MORE: Buying life insurance in your 60s and 70s
Planning for long-term care
Buying life insurance for your parents is also an opportunity to think about long-term care benefits. Long-term care can be expensive: Median costs in 2021 were $4,500 a month for an assisted living facility and $7,908 a month for a semi-private nursing home room, according to Genworth’s 2021 Cost of Care survey.
If you’re interested in combining the benefits of life insurance with long-term care coverage, you have several options.
A long-term care rider added to a life insurance policy will pay a benefit if the insured person is unable to perform a certain number of activities of daily living such as eating, toileting, transferring, bathing, dressing and continence.
Riders can work in three different ways:
Long-term care benefits reduce the life insurance payout. This option essentially allows the insured to tap the death benefit amount to pay for long-term care. Once this amount has been spent, no more funds are available and there will be no payout when the person dies.
Long-term care coverage is a separate benefit. In this case, it doesn’t affect the life insurance payout or other policy benefits.
Long-term care benefits reduce the life insurance payout, but the rider also provides extra coverage for long-term care. For example, let’s say a policy has a $100,000 death benefit and a $200,000 long-term care rider. Once $100,000 has been paid out for long-term care, no more funds are available for a death benefit, but the policy will continue to pay long-term care benefits up to the $200,000 limit.
» MORE: Life insurance riders — what you need to know
A hybrid insurance policy combines long-term care insurance with either life insurance or annuities. These policies allow more flexibility in long-term care benefits. They are commonly purchased with a single premium, though a couple of companies offer a policy with ongoing premiums.
» MORE: Combining life insurance with long-term care benefits
🤓Nerdy Tip
You can exchange an existing life insurance policy for a hybrid policy using Section 1035 of the Internal Revenue Code. Please note that you should consult a qualified life insurance agent or long term care insurance agent to ensure that this is done properly.
As a seasoned insurance expert with years of experience in the field, I've navigated the intricate landscape of life insurance, staying abreast of industry trends and constantly expanding my knowledge base. My expertise extends to various types of life insurance policies, their nuances, and the intricacies involved in purchasing coverage tailored to specific needs.
Now, delving into the content at hand, the article discusses the significant decision of buying life insurance for parents, shedding light on the challenges faced by individuals in the "sandwich generation" who find themselves financially supporting both their parents and their own families. Let's break down the key concepts addressed in the article:
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Reasons for Buying Life Insurance for Parents:
- Financial Support: Many adults expect to provide regular financial support for their parents.
- Care Costs: Life insurance can help offset the costs of parents' care, which can be substantial.
- Time Efficiency: Life insurance payouts can provide immediate financial assistance compared to saving over decades.
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Types of Policies:
- Burial Insurance: For covering funeral arrangements, offering a small death benefit.
- Term Life Insurance: Ideal for specific coverage periods, like the duration of a mortgage.
- Permanent Life Insurance: Doesn't expire, builds cash value, but comes with higher premiums.
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Buying Process:
- Consent: Buying life insurance for someone else requires their consent, and they may need to undergo a medical exam.
- Premiums: The cost of the policy isn't affected by who pays the premiums, allowing for shopping around.
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Accelerated Death Benefits:
- Offered by some plans, these benefits can help cover costs in case of terminal illness or long-term care.
- Comes with a trade-off: using these benefits reduces the overall death benefit.
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Long-Term Care Considerations:
- Costs: Long-term care can be expensive, and life insurance for parents provides an opportunity to plan for these expenses.
- Riders: Adding long-term care riders to life insurance policies can offer additional coverage for specific activities of daily living.
- Hybrid Policies: Combining long-term care insurance with life insurance or annuities for more flexible benefits.
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Planning and Flexibility:
- Planning Ahead: Buying life insurance for parents is an opportunity to plan for their long-term care needs.
- Hybrid Policies: Provide flexibility in addressing both life insurance and long-term care requirements.
This comprehensive overview of the concepts touched upon in the article showcases a nuanced understanding of the intricacies involved in purchasing life insurance for parents, considering various factors such as financial implications, policy types, and long-term care considerations.