Buying Life Insurance for Parents

As an adult, you can buy life insurance for your parents. This assumes there is a financial loss that would pass on to you if your parents passed away.

One of the most common reasons for purchasing life insurance is to cover funeral expenses. Parents may also leave behind significant medical bills and debts, in addition to legal bills for processing their will and settling their estate.

If your parents are unable to cover these costs, you and other family members may be forced to pay them out of pocket. End-of-life expenses, unpaid medical bills, outstanding debts, legal fees, and other expenses can be covered by the life insurance death benefit.

Can you buy life insurance for your parents?

You can buy a life insurance policy for a parent if you have: 

• an insurable interest in their life (that is, you would experience financial hardship and loss upon their death)
• their written permission

Children generally have an insurable interest in their parents, but if you want to buy a large policy for them, you may have to prove an insurable interest. 

Why should you buy life insurance for your parents?

Your parents may think they do not need life insurance, but if you or someone else would suffer financially if they pass, life insurance is worth considering. The proceeds from the policy can help cover unpaid expenses after their death.

Here are some common reasons why you may want life insurance for your parents:

1. Funeral costs: On average, a funeral can cost $10,000 or more in Canada. Taking out a small whole life insurance policy for a parent helps ensure you or another family member will not have to shoulder the cost. 
2. Financial debts: Outstanding loans, like credit card bills, still have to be paid after a parent passes away. A life insurance policy can help surviving family members pay off these bills. 
3. Mortgage: If your parents want to pass down their house to you but have not yet paid off the mortgage, a life insurance policy can come in handy. If your parents pass away with a mortgage balance, you can use the proceeds of their policy to pay off the remaining loan. 
4. Boosting retirement income: If a parent earns a retirement income that will stop upon their death, life insurance can act as an income replacement tool for the other parent. For instance, your retired dad receives pension benefits that stop in the event of his death. If your dad passes away before your mom, she will lose an important source of income. The proceeds from your dad’s policy can help replace all or part of the lost income.  
5. Leaving a legacy: Besides covering funeral expenses and debts or replacing retirement income, a life insurance policy taken on a parent can allow them to leave behind an inheritance or donate money to a cause close to their heart. 
6. Taxes: A life insurance policy can help reduce the financial burden of paying the taxes of a parent upon death. 

What is the best life insurance for your parents?

The right type of life insurance for your parents depends on their personal situation, age, and health. If your parents are relatively young and in good health, you will have more options for life insurance and the premium rates will be lower. 

Term Life Insurance

Term life insurance policies provides life insurance coverage for a set length of time, such as 10 or 20 years, or until a specified age. Term life insurance is less expensive than permanent life insurance because it has an expiration date and does not accumulate cash value. The insurance payout, on the other hand, is not guaranteed. Only if the insured dies during the policy term does the insurance company pay the death benefit.

Purchasing term life insurance for your parents can be beneficial if you wish to cover any debts they owe. It may also be a more appropriate and cost-effective choice if your primary objective is to provide a replacement income for the surviving parent. 

Whole or universal life insurance

If you want your beneficiaries to get a payout regardless of when you die, whole life insurance and universal life insurance are good options. Both generate cash value, though most policies require several years to collect any significant cash value. Whole life insurance is often more expensive than universal life insurance, but the cash value grows at a predictable rate.

Whole and universal life insurance are often 10 to 15 times more expensive than term life insurance. Nonetheless, they may be a preferable option in certain circumstances. If you wish to cover a parent's final needs and allow them to leave money to heirs or a charity, consider whole and universal life insurance. Either of these insurance programs can be useful for estate planning.

Simplified issue life insurance

Simplified issue life insurance is a type of permanent life insurance that can be obtained by completing a few easy health questions. Because this type of insurance does not require a medical exam, health plays a minor role in the approval process. This makes simplified life insurance available to parents who are unable to qualify for a standard coverage due to an underlying condition.

Obtaining coverage for simplified issues insurance is simpler, but not guaranteed. If the applicant has a serious illness or is not effectively managing an underlying condition, the insurer may refuse them. If a parent is denied simplified issue life insurance, the sole option is a guaranteed issue plan.

Because simplified issue allows you to avoid the medical exam, the premiums are more expensive compared to regular permanent life insurance. In addition, many simplified issue policies have a two-year waiting period. If the insured dies within this period, the insurer will not pay the death benefit unless the death is unintentional. The beneficiary will only get the premiums put into the policy up to that point, however some insurers may include interest.

Guaranteed issue life insurance

Medical underwriting is not required for guaranteed issue insurance. To demonstrate eligibility, you do not need to take a medical exam or answer health questions. Because acceptance is based on age, you can purchase coverage as long as you are in the appropriate age range.

Consider applying for a guaranteed issue plan if your parent has a severe illness that makes them ineligible for both regular life insurance and simplified issue. Keep in mind that these policies cost more than fully-underwritten and simple problem plans. Furthermore, the death benefit is usually limited to $25,000 or less.

Another disadvantage is that guaranteed issue policies require a two-year waiting period before paying out. If the insured dies during this time period and the cause of death is not an accident, the beneficiary will get just the premiums paid into the policy, not the death benefit.

Final expense life insurance

Final expense life insurance, also known as burial insurance or funeral insurance, is a special life insurance product. Its purpose is to help the beneficiary pay the insured’s funeral costs and unpaid medical bills rather than provide them with a replacement income. As such, these policies have smaller payouts compared to traditional life insurance plans. Some final expense plans have no medical underwriting at all, while others involve health questions but not a medical examination. 

Consider a final expense policy if you want life insurance to help cover a parent’s end-of-life expenses. It is a smaller whole life insurance policy that provides lifetime protection, as long as the premiums are paid. 

How to buy life insurance for your parents

Buying life insurance for your parents is not that different from purchasing coverage for yourself. The main difference is that you will need their consent. 

Here are the steps you need to follow to purchase life insurance protection for a parent:

1. Obtain your parent’s consent

You cannot buy a life insurance policy on someone else’s life unless they give you permission. If you want to buy a policy for a parent, start by sharing your reasoning with them and getting their consent. Also, if you have a traditional life insurance policy in mind, make sure your mom or dad is willing to take a medical examination. 

2. Ensure you can demonstrate insurable interest

If asked, you should be able to prove an insurable interest in your parents. Having insurable interest in a person basically means you will suffer a financial loss of some kind if something happens to them. Children are generally assumed to have insurable interest in their parents, but if the death benefit is too large, the insurer may ask for proof. 

3. Select the right kind of policy

People take life insurance to meet specific financial goals. Not every person has the same goal, so there is no one type of policy that is right for everyone. 

For example, some people use life insurance to cover the years remaining of mortgage. Some others, however, want life insurance to pay for their funeral costs and end-of-life medical bills. Since these goals are different, they would need a different type of life insurance policy.   

Life insurance plans are of two types: term and permanent. Both of them have their pros and cons and are suitable for different purposes. 

For many people, the biggest attraction of permanent life insurance is its lifetime coverage. The insurance policy remains in effect as long as the insured lives. That means you can be 100% sure that the insurer will pay the proceeds one day. 

Consider a permanent life insurance policy for parents if they have financial needs that have no fixed end date. For example, a parent may use this type of policy for: 

• paying end-of-life expenses
• leaving an inheritance 
• making a donation to a church or charity.

Term life insurance, in contrast, is a better choice for financial goals with a definite end date. That is because it lasts for a specific period chosen by you. Some of the most common liabilities that term life insurance can cover are:

• mortgage 
• other debts
• income replacement. 

Unlike permanent life insurance, term life does not guarantee an insurance payout. If the insured outlives the policy’s term, there will be no payout. That is why term life is significantly more affordable than permanent life insurance. 

4. Determine how much coverage your parents need

Look at your parents’ assets, debts, savings, and financial liabilities to figure out how much life insurance coverage they need. 

5. Shop around for a policy

The cost of life insurance for seniors can vary greatly between insurance companies, particularly for those seniors with underlying health conditions. Shopping around is the best way to ensure you are paying the lowest premium rates. 

6. Apply for coverage

Once you have picked an insurance carrier, apply for a policy. Your mom or dad will need to sign the application form, since you cannot buy a policy on someone without their consent. 

How much coverage do you need?

The amount of coverage you require is determined by your needs. Are you purchasing a coverage to cover your parent's funeral and last medical expenses? Given that the average funeral in Canada costs roughly $10,000, you should have at least $10,000 or $15,000 in coverage.

Do you wish to get a life insurance policy to pay off your parents' debts? If this is the case, the insurance must be large enough to cover their entire debt.

In summary, the life insurance policy you purchase on a parent's life should be sufficient to cover any potential financial loss you will face if they pass away.

Alternatives to life insurance for your parents

If you are likely to struggle to pay for a parent’s funeral costs and unpaid medical expenses, other options worth considering are: 

1. Prepay the funeral costs: Prepaying for a funeral means working with a funeral company and choosing the plan and paying for the services in advance. Estimates suggest prepaying for a funeral can save up to 30%. 
2. Opening a dedicated savings account for covering funeral expenses: Another option is to set up a savings account for covering end-of-life expenses and deposit money into it on a regular basis. You may also ask your parents to make contributions if they can. 
3. Request your parents to buy life insurance: Rather than buying a policy for your parents, you can ask them to take out a policy and designate you as a beneficiary. In the event of their death, you can use the insurance proceeds to cover end-of-life expenses. 

Conclusion

You can buy life insurance for your parents if you think it would help offset the financial loss that you will suffer upon their death. But you will need their consent. You cannot take a life insurance policy on someone without their approval. 

Speak to your parents if you think they need life insurance and to determine the right level of coverage and right type of policy. We at Dundas Life work with top life insurance companies in Canada and can help you secure the best coverage at the lowest price. Reach out today!