Select the Right Kind Of Policy To Accomplish Your Goal
Quick Tip: Decide if you need insurance for just a temporary period of time or insurance that will be permanent…
As you may know already know, there are several types of insurance policies you can purchase. Each one was created differently and can help you accomplish different types of goals. Some will have higher cost than others and some will have different pros or cons. This is because each was created with a different idea in mind.
Using the quick tip above will help you start to decide which path you might want to consider as your ultimate solution.
Life insurance can be broken down into two main categories. There’s permanent (whole life) and temporary (term) insurance coverage. They each have their pros and cons and should be used accordingly.
Permanent Whole Life Insurance
A permanent (whole life) policy is just that – a permanent plan that will be with you for your whole life. It will not expire as long as you’re making the monthly payments. You should buy a whole life insurance policy when you know that your goals are going to remain the same for the rest of your time here on earth.
Here’s some of the most common examples:
- End of life expenses such as a funeral, final medical bills, etc.
- Donation to church, charity, nonprofit, etc.
- Estate planning
The great upside to (permanent) whole life insurance is that you can’t outlive it – it will be there until you pass away. It’s one of the few insurance policies you purchase with the guarantee that it’s going to get used no matter what. You can be assured it will ultimately satisfy whatever goal you have for the purpose of getting the policy.
The potential downside is that it costs more than term insurance (described below). This is because the insurance company knows that they will eventually have to pay 100% of the policy amount.
Again, keep in mind that if the need is permanent, your life insurance should be too. Burial/cremation costs are a necessity upon passing. These costs aren’t going to go away and neither should your planning on how to take care of it.
Term Life Insurance
A temporary or term policy is one that is designed to end/ expire after a pre-determined amount of time. Once the “term” is up, the coverage simply stops until you find another way to cover yourself. Term policies can range from 5, 10, 20, or even 30 years. The older you are, the fewer options you’re going to have for a term life insurance policy. You should only buy a term life plan if your goal is to cover a temporary liability.
Here are some of the most common examples:
- Auto Loan
- Business Loan
- Income replacement
The biggest upside to term insurance is the cost. It is by far the least expensive of all types of life insurance. However, the drawback is that it expires after the term. If you haven’t passed away during that term period, all those monthly payments you made most likely won’t be returned (unless you pay extra for Return of Premium). That’s why you should only buy term when your objective is also temporary.
Term life insurance is designed to cover you when you’re younger and are more likely to have higher amounts of debt. Although most of us will not pass away when we’re younger, it’s a “just in case” policy. Ideally, that term would end around the same time that much of that debt is paid off, thus reducing the need for coverage if you’re relatively debt-free…
With that being said, try not to be pulled in by the lower cost of a term plan when you have a permanent objective. The money you think you are “saving” each month won’t help you when the policy expires and you still need coverage for something permanent.
Avoiding Tax Consequences
Imagine for a moment…from a tax perspective, a life insurance policy operates like how a tripod would to keep an object (The IRS) stable and happy. It’s made up of three legs or components which are…
- The person who is being insured.
- The person that “owns” (owner) the policy, usually the one paying for it.
- The beneficiary that will receive the distribution at some point.
To avoid a potential tax bill, you almost always need to make sure that two of the three legs are the same person.
If all three legs are a different person, the distribution could be considered taxable. If the distribution is determined to be taxable, the tax burden or taxes owed would fall on the owner of the policy NOT the beneficiary.
Here’s a basic example:
Let’s say you have the typical, grandparent, child and grandchild scenario where grandparent wants grandbaby to receive a distribution…
- Insured = Grandma
- Owner = Child – Ryan
- Beneficiary = Grandbaby
Upon the passing of grandma, grandbaby will receive the proceeds of the policy since they are the beneficiary. The IRS will view the death benefit as a gift to grandbaby since the child/Ryan was the owner of the policy.
The child, Ryan, paid for a service (the life insurance policy) that resulted in grandbaby receiving money. In the eyes of the IRS, they look at this the same as if Ryan had just given his kid (grandbaby) a personal check for $20,000.
To be safe, make sure you’re either talking to a tax advisor prior to deciding who the three people will be OR make sure two of the three legs are the same person. Without getting too deep into the weeds, here are two quick points to wrap up the tax section:
- The IRS does allow for you to gift a certain amount to a child tax-free which is 15,000 as of 2019. This number is expected to stay the same as we move into 2020. So even if there were three different people on the policy, if it was a payout less then 15,000, you most likely still wouldn’t incur taxes.
- It is still possible to pay for a policy and NOT be listed as the owner. So, you could still pay for life insurance for your parents, have them be both the insured and owner, leaving grandbaby as the beneficiary and keeping the IRS happy all at once.
At the end of the day, there are multiple ways to structure things to avoid taxes. This section also highlights the importance of working with a group of agents (like us here at Simplegacy) that thoroughly understands this information.
Work with an Independent Agent
When working with an insurance agent/company, just know that there are dozens of insurance companies to choose from. Each one of them has their own process for assessing the risk of insuring a person and then charging for that risk. The older a person gets, the more variables that need to be considered and the more drastic the pricing may be from insurance carrier to the next.
In the life insurance space, there are two types of agents that you can choose from:
- Captive agent: This is an agent who can only represent one single company. A State Farm agent is a captive agent. They can only sell you State Farm insurance, period. Whatever rate State Farm have for their policies, those are the fixed rates they have to charge. They cannot represent any other insurance company to get a better rate.
- Independent agent: An insurance agent who is free to represent as many independent insurance companies as they want.
So why does this matter?
If there are two agents, Mr. Captive only represents one insurance company. Mr. Independent represents 30 insurance companies. Odds are Mr. Captive is going to be the agent that finds the better/cheaper policy for you at the end of the day because they have 30 different companies rates to choose from.
Mr. Independent will never be in a position to sell you something that doesn’t work because he/she has endless options. You won’t have to worry about if the policy was the best one. With an independent company like Simplegacy, you also won’t be cross-sold into buying other types of insurance because independent agents only focus on specific policies such as burial insurance, funeral insurance and final expense insurance (whole life).
Why Having Choices Is So Critically Important
Each insurance carrier is different. Some insurance companies might not be okay with certain medical history problems. This is a key component to working with independent agents. They can segment companies that are more strict on health concerns if that is a foreseeable problem.
There’s No Such Thing as Too Much Health Information
The health of your parents is going to be the biggest factor in getting them coverage and being able to find them the best option for the best price. As we’ve mentioned prior in this article, every insurance company is different, so the more information you have, the easier it is for the agent to narrow down on the insurance company that’s going to be the most flexible with your parent’s health.
Simply put, if your mom/dad doesn’t want to share that with you or you don’t know, there’s no way someone can effectively help you. Can you still get a generic quote based on age, gender and tobacco usage? Sure, but it won’t be useful for you to make budgets or decisions from that number because it won’t be based on them specifically.
You should try to obtain the following:
- Past & present prescription medications
- Name of the medication, dosage amounts, how often they take the dosage and if their primary physician as made changes to any of that information in the past 2 years.
- Past & present diagnosed conditions such as high blood pressure, COPD, CHF, diabetes along with when the diagnosis was.
- Prior major events such as heart attacks, strokes, hospitalizations, cancer, etc along with when it occurred.
- Height and weight
- Tobacco and alcohol usage
- Any high-risk habits such as sky diving, rocking climbing, scuba diving, etc.
- Details on any substance abuse or DUIs in the past few years.
What if you can’t get all that info?
If you can’t get it all, try to focus on the prescriptions. Medicine is always prescribed for a reason and can start to paint a picture of what their health situation is just by knowing the medications.
Before committing to an insurance carrier and starting an application, we will still want to know all the other information also, but for quoting purposes medications alone can often help provide good estimates.
Mind Your Budget
You may want to have a certain amount of coverage on your mom or dad, but you should still ask the hard question of “can it fit in the budget?”
People ask us all the time, “how much should I buy” and our first response is to buy “whatever you can comfortably financially afford.”
There are two key things to remember when deciding if the budget can handle it:
- These policies are only active if the payments are getting made. No payments equals no coverage.
- Life will happen and we all go through times where the budget gets tight and we start considering what can be cut. Don’t let the life insurance policy be the thing you cut if you can find other options.
There is nothing worse than a client stretching themselves too much only to cancel a policy 9, 15 or 20 months down the road because they can’t handle the payment and now, the payments goes to waste and they have nothing to show for it.
This might mean you’ll need to cut back a little on the amount of coverage, but at least you’ll still have coverage.
We’ve had countless people tell us they wish they would’ve had a more affordable policy they didn’t have to cancel so that their mom and dad would’ve had coverage regardless of how little it might have been.
Don’t forget, a final expense policy is the one insurance that we can guarantee everyone will cash in on! We are all going to die and have to spend money on laying a loved one to rest. To be safe, make sure that you pick a policy that you can afford so it’s there when you need it most.
Get this done As Soon As Possible
When it comes to life insurance, it pays to be proactive early on. Insurance NEVER goes on Sale! And there are NO Senior Discounts on Life insurance either!
Reality completely backs up that last comment when it comes to buying life insurance!
Consider the following:
- The older you are; the more it will cost.
- Your health is not guaranteed. Your parents could experience a sudden downturn in their health, impacting their rates and/or the eligibility altogether.
- If your parent’s health is already questionable, they may have to go through a waiting period before being fully 100% covered. In these situations, you want to start chipping away at the waiting period as soon as you can.
In nearly all situations, especially for elderly; the sooner you get coverage, the better. Get your parents life insurance coverage now.
Frequently Asked Questions
Here are some of the most frequently asked questions we get about buying life insurance for parents.
Side Note: If you have a question that is not listed here, please let us know! You can call us directly at 888-519-9119 and one of our agents will promptly get you your answer. On the other hand, you can email us at [email protected], and we will respond as soon as we can.
Q: Can I buy a policy on my parents?
A: Yes, you can. It’s quite common for kids to purchase coverage on their mom or dad. Even if your parents have a policy now, you still take out another one on them.
Q: Can I take out a policy on my grandparents?
A: You absolutely can! Every day we help grandchildren secure life insurance on their grandparents.
Q: Do I need their consent to buy life coverage on my parents?
A: Yes, you most certainly do. There is no scenario where you buy life insurance on any adult without their consent. This rule applies even if you have power of attorney over them.
Q: What is insurable interest?
A: This refers to whether or not the beneficiary of the policy would be financially impacted in some way by the passing of the insured.
The fact that you are the child/grandchild of your parents/grandparents satisfies the insurable interest requirement 99% of the time.
Now if you’re set up as the beneficiary of your fishing buddy, that might be another story! 😉
Q: What is the difference between the owner and the beneficiary?
A: The beneficiary of a life insurance policy is the one who will receive the proceeds of the policy upon the passing of the insured.
The owner of a policy is an individual or entity that is in control of the policy. Only they can make changes to the face amount, beneficiaries, or any other aspect of the policy.
Q: Can I name more than one beneficiary?
A: Yes, you can! You can have as many beneficiaries as you want. You can also name as many backup (contingent) beneficiaries as you’d like too.
Q: I have life insurance through the military, can I add my parents to it?
A: Life insurance through the FEGLI program is not our area of expertise. Here are is a good post that may help answer your question. Life insurance from the VA is VERY different than coverage through private insurance companies.
Q: Do I need to physically be with my parents to apply with them?
A: No, thankfully with all the advances in technology, we can use email, phone conversations and a couple other ways to secure the required signatures/ agreements to apply for coverage and set up scheduled payments.