Should I Get Life Insurance for My Parents?

With a life insurance policy, the surviving parent can enjoy improved financial security. They can use the policy to pay off their home's mortgage, eliminate medical bills, cover final expenses and perhaps even leave a legacy for their grandchildren. 

As important as this safeguard can be, however, there are some key considerations to keep in mind before you buy a policy for your parents. 

How to set up life insurance for your parents 

In some cases, it may be easier for parents to purchase policies on their own and name you as the beneficiary. But if you want to take out life insurance coverage for your parents, there are a few steps you need to take: 

1. Obtain consent

You need your parents’ consent to apply for and purchase a life insurance policy in their names. 

Although you can be the policyholder and pay the premiums, your parent is the designated insured person. As such, they must sign the insurance application, answer medical questions and (if applicable) take a medical exam. They must be aware of and consent to the policy's terms and details. 

2. Establish an insurable interest

The law only allows you to buy insurance on the life of family members if you have what’s called an “insurable interest.” This means that the death of the policyholder (your parent) would cause financial losses to the policy beneficiary (you). 

Here are some examples of situations in which you may have an insurable interest in one or both of your parents: 

• You cosigned a loan for your parents to buy a car, house or other purchase
• You're responsible for your parents' end-of-life and burial expenses
• You're responsible for your parents' long-term care or assisted-living expenses
• Your parents' will names you as the inheritor of their home, and there’s a mortgage on that home

As a child seeking coverage for a parent, you may have to go through a phone interview with the insurance company to establish insurable interest. For most child-parent relationships, the process of establishing insurable interest is fairly simple and straightforward. The representative will ask you questions about your relationship with your parents and your finances. 

3. Choose the right type of policy

Which type of life insurance plan is best for your parents depends on their age and health, and your budget. The two major types of life insurance are term and permanent life insurance. Here are the considerations you should keep in mind for each of these insurance products: 

Term life insurance for parents

Term life policies provide coverage for a term period, such as 10 or 20 years. If the insured person dies during the policy term, the policy's beneficiary receives the death benefit payout. 

Term policies tend to be less expensive than permanent life insurance, particularly for those who are younger and in good health. But, if your parents outlive the policy's term, there is no death benefit unless you renew, or unless you have a policy that can be converted to being permanent, and you make the conversion.

Permanent life insurance for parents

With permanent life insurance policies, such as whole life coverage, the policy stays in place as long as premiums are paid. Plus, these policies have a cash value portion that can grow over time. Your parents can borrow against the cash value to help fund major expenses. 

Whole life insurance policies are usually more expensive than term life insurance, but they can be useful tools for estate planning. Before you buy, consider consulting a professional, like a financial planner, to help you understand the potential pluses of a policy for your parents’ estate.  

What to consider before you apply for a policy

Before applying for a policy, consider these issues: 

Policy ownership

Your parents can apply for the policy and own it themselves. Or you can own the policy, and your parents are the insureds. The latter scenario can make more sense if you'll be paying for the premiums; such a structure allows you to more easily manage the account yourself and ensure that the policy remains active. 

Amount of coverage

When deciding how much life insurance to purchase, consider the following expenses: 

• Funeral costs and burial or cremation costs
• Outstanding debt your parent may leave behind
• Financial support for the surviving parent or other dependents
• Charitable contributions your parent may want to make

If you're not sure what the best life insurance death benefit is, set up a meeting with a financial planner or other professional. The expert will review your parents' finances with you, discuss their needs and help you calculate how much coverage is necessary. 

Parents' health and eligibility

Your parents' ages and health affects their eligibility for coverage and their rates. If they have pre-existing or chronic health conditions, they may have fewer life insurance options, and the policies available to them are likely to be more expensive than if they’re in excellent health. 

Applying earlier can help them secure coverage at an affordable rate. For example, purchasing coverage while your parents are in their 60s will be easier and usually cheaper than when they're in their 70s. 

Life insurance can be worth it for the peace of mind it brings to a parent who doesn’t want their end-of-life expenses to be a financial burden on their loved ones.

Choice of provider

Your life insurance company is an institution you and your loved ones will need to rely on for years – or potentially decades – into the future. It’s very important to choose a company that's reliable and financially sound. 

When looking for a life insurance provider, look for a company with a better-than-average score on the National Association of Insurance Commissioners’ NAIC Complaint Index and positive customer reviews on third-party customer review platforms such as J.D. Power. While almost all insurers are financially strong, you can also consider those with outstanding financial strength ratings from agencies such as AM Best.