Can I take out life insurance for my parents?

Losing a loved one is a difficult and distressing ordeal. Life insurance is there to help make sure your family and dependents are looked after should the worst happen to you. It brings peace of mind that even though those left behind may be suffering emotionally, financial issues and uncertainty will not become a problem.

But how does this translate to losing a parent? What do you do when the death of a parent leaves you struggling to pay off their debts, care costs or medical expenses? Is there any financial safety net which can be put in place to help deal with such a situation?

It is, in fact, possible to take out life insurance for your parents. However, in order to do this, you have to be able to prove that you have something known as insurable interest before any insurance company will allow you to take out cover.

What is insurable interest?

Insurable interest is when you or a group of people have a financial interest in another person’s life. You can be said to have insurable interest on a person if their death would lead you to suffer a financial loss or difficulties. So, in the case of your parents, you could take out life insurance for them if you can show that their passing would leave you with financial hardship, such as covering care costs, paying off their mortgage or funeral costs. It was recently revealed that the average family is picking up a £1,800 shortfall on funeral costs, caused by 40% of loved ones not putting enough aside to pay for it [1], so making plans for after a parent’s death is important. Most insurers will issue life insurance for any family member who has a financial interest in another member, such as a parent, sibling, child or spouse, provided that insurable interest is present. This demand for insurable interest means it is usually only close relatives that can be covered, preventing others from trying to ‘cash in’.

What are the main reasons for taking out insurable interest on parents?

• Debts. You may be held responsible for outstanding debts left behind by your parents, such as credit card bills or mortgage repayments.
• Health care. Your parents may receive private health care and bills may be left unpaid at the time of their death. These bills may then fall to you so you may want to ensure they will be covered by life insurance money.
• Funeral expenses. The average cost of a funeral in the UK today is more than £4,000. A life insurance policy could help mean you are not hit by a hefty funeral bill after the death of a parent.
• Tax. In some cases, life insurance on your parents can be used for inheritance tax planning purposes.
• Another reason you may want to take out life insurance for your parents is because you rely on them for income. In order to get a policy in place in this case, you would need to prove insurable interest.

Do my parents need to know I have life insurance for them?

Your parents have to consent to you having life insurance for them. Just as in taking out a life insurance policy for yourself, age, health and medical history will be needed to complete the application. It is possible your parents will need to undertake a medical examination as part of the application.

It is important too that you are able to show through accounts and documentation an insurable interest for your parents. It must be clear that your parent’s death will result in you suffering a monetary loss or hardship. As the policyholder, it will be you who is liable for the monthly payments.

Things you need to discuss with your parents before taking out life insurance for them

Before taking out life insurance for your parents, you need to know:-

• Do they already have any life insurance policies in place? If they do, find out what they will provide upon their death. They may already have things covered, resulting in no financial hardship to you.
• If you still feel you will face a financial hardship upon their death, you must seek their consent to get life insurance for them.
• You need to check they are happy for you to access their financial records and they are willing to speak to insurers to give their consent and provide medical details for underwriting. How much contact is needed during underwriting varies from provider to provider.

What type of cover?

Once you have gained consent from your parents and have been able to prove insurable interest, you need to decide what type of life insurance policy you want to take out for them. There are many types of life insurances available and you need to find the best policy for you and your parents. Their advancing years and health may make it difficult to find affordable insurance in some cases and you may find premiums are high. Bear in mind, too, when taking out insurance life expectancy is currently high in the UK, standing at 79 for males and 82.9 for females [2].

There are two main types of life insurance – term and whole of life.

Term life insurance

Term life insurance allows you to choose the amount you want your parents to be insured for and the length of time you wish to cover.

There are three main types of term life insurance: –

• Level term: The amount of money you will receive remains the same, whether your parents die within a few years of the policy being taken out or three decades later. For example, you may take out an £80,000 level term policy over 40 years. Whether they die in year one or year 38, you will receive £80,000. This is one of the key advantages of level term life insurance, together with the fact you can plan and budget. If your parents survive the term, then the policy expires and your premium payments are not reimbursed.
• Decreasing term life insurance: The payout you receive decreases over the term of the policy. This can be a life insurance option if your parents still have a mortgage. The payout falls in line with the outstanding balance on their mortgage. You may find life insurance decreasing term is often cheaper to buy and means you are not suddenly left facing a big mortgage bill. But it is not suitable for interest only mortgages and the payout may not be enough to cover other expenses that may arise upon the death of your parents.
• Increasing term life insurance: The payout you receive increases as the life insurance term continues. The longer into the life insurance term your parents survive, the bigger your family’s payout will be. This is a good inflation-busting move but this type of policy can also be known for its increasing monthly rates and regular medical checks.

The other life insurance option is whole life insurance.

Whole life insurance: As the name suggests, this type of insurance policy pays out a lump sum when your parents die. It is often more expensive than other forms of policy as it is insurance for life A payout will definitely come at some point. A benefit of this type of life term insurance is that you usually pay premiums up to a certain point and will then stop, for example, when your parents reach 90.

However, if you are taking out life insurance for your parents, it is probably because they are getting a bit older. This may make some insurance policies more difficult to get and you may find extremely high premiums. Another option is to take out over 50s life insurance.

Over 50s life insurance

This type of life insurance is for anyone aged over 50 and the key benefit is that acceptance is guaranteed regardless of your health or medical history. It also runs for the rest of your parents’ life, provided that you keep up with the fixed premium payments. When your parents die, you will get a lump sum, tax free payment.

However, premiums for this type of life insurance policy can be high since a payout is guaranteed at some point. The lump sum is fixed and is therefore not inflation-proof, while some insurers do not pay out the full sum if death occurs within the first couple of years (check terms and conditions for this). Payouts also tend to be far smaller. This makes them suitable for covering expenses such as funeral bills but may not provide enough for bigger bills or debts.

How do I know which is the best life insurance for my parents?

To find the best life insurance for your parents, you need to evaluate your own situation. There are many factors which will impact which is the best one for you and for them.

These include their age and health; the scale of the financial hardship you expect upon their death and the level of monthly premiums you can afford.

You also need to compare deals to help find the best one for you. Free Price Compare can help you do this. Use our online tool to enter your details and we will search dozens of insurance providers, showing you the best deals around. It takes just a few seconds to find the right deal for you. Simply tell us what type of life insurance you want, how much cover is needed, the cover length and any add-ons and we can quickly compare quotes from dozens of providers.

Can I take out life insurance for anyone other than my parents?

You can take out life insurance on other family members, as well as those to whom you are not related, provided that you have their permission and you can prove insurable interest is present. A married couple in which one spouse depends on the other financially will likely be able to prove insurable interest. Most life insurance companies will cover other family members but only non-relatives if a clear and demonstrable insurable interest is present. If the profitability of your business depends upon the unique skills and knowledge of an individual or group of people you may also have an insurable interest there. ‘Key man’ policies can be used in this case to cover significant employees in the event of their death.

In conclusion, life insurance for your parents is certainly a possibility, provided that you can demonstrate an insurable interest. You also need to have your parents’ consent to take a policy out. Once that is achieved, taking out life insurance for your parents is similar to taking out life insurance for yourself. You need to evaluate both yours and your parents’ financial situations before deciding whether whole life insurance, term life insurance of over 50s insurance is the best choice for you. Always compare deals to find the best one around by using Free Price Compare.

References

• [1]www.yorkshirepost.co.uk
• [2]www.ons.gov.uk