Enquiries about life insurance for parents are more common than many people might assume. When your parents die, there may be scenarios where you are left with a potential financial liability which could be covered by life insurance.
The most common financial liabilities include funeral costs and potential inheritance tax payments.
Whether you are looking for life insurance for your parents with you as the beneficiary or individual policies set up to provide financial assistance for your surviving parent, there are many options out there.
However, there are various factors to take into consideration when approaching life insurance companies, with the age of your parents and any existing medical conditions impacting cover availability and premiums.
Can You Take Life Insurance on Your Parents?
Yes. It is possible to take out a life insurance policy on one or both of your parents. Normally you would require the consent of your parents, evidence of an insurable interest and in some cases, they may need to take a medical. However, if your parents are over 50, then the requirement for a medical is often waived.
What Is an Insurable Interest?
An insurable interest is evidence of a financial loss which would be passed to you in the event of your parent’s death. The most obvious insurable interest would be funeral costs, although there may be other issues to take into consideration. Without evidence of an insurable interest, it is unlikely you will be able to obtain life insurance.
Are My Parents Classed as an Insurable Interest?
Yes. While it may feel a little uncomfortable taking out a life insurance on your parents, you need to take into account the long-term financial consequences of their death. Taking out life insurance on an insurable interest is something which is commonplace across the insurance industry.
This is a perfectly legitimate element of financial planning, and the subject of insurable interest should be discussed with your financial adviser.
What Other Parties Are Classified as an Insurable Interest?
There are many examples of insurable interest where it is perfectly legitimate to take out life insurance, obviously with the person’s consent. For example, if you are run a company with your business partner, it is not difficult to see the potential financial consequences of their death.
This could have a huge impact on your finances, cost of running the business and ultimate control. Therefore, you will find that many businesses have various types of insurance cover for individuals classified as an “insurable interest”.
Can I Take Out Life Insurance on My Parents to Cover Inheritance Tax Liabilities?
Yes. In this particular scenario, it is perfectly legitimate to see them as an “insurable interest” because their death may well leave you with significant inheritance tax liabilities. We have seen many situations where beneficiaries have been forced to sell properties to cover inheritance tax, often leaving them with next to nothing. Indeed, there are occasions where the culmination of tax liabilities and debts can actually leave a deficit in overall assets left.
While the issue of inheritance tax is often a difficult subject to bring up with your parents, it is a conversation you should have sooner rather than later. The last thing you or your parents would want is for any unforeseen tax liabilities to emerge in light of their death.
The majority of people find a degree of comfort in the fact that they will be leaving behind assets for their children and family. So, classifying them as an “insurable interest” is certainly not derogatory or morbid and is more a case of common sense.
Will I Pay Tax on Any Life Insurance Payout?
Traditionally you should not be exposed to either income tax or capital gains tax when in receipt of a life insurance payout. The majority of life insurance policies are “written in trust” which effectively separates them from the estate of the deceased.
As a consequence, the life insurance payout will not be included in net asset calculations and will, therefore, be removed from potential inheritance tax liabilities.
What Is “Written in Trust”?
When you take out an insurance policy, you will likely be advised of the “written in trust” structure which effectively means that the insurance policy and any future payments are treated as a separate legal entity.
They are not considered part of the deceased’s estate, and therefore under normal circumstances, they would not attract any form of additional taxation. There may be occasions where a life insurance payout is paid into a trust where the additional funds may attract some form of taxation.
However, the use of life insurance policies within a formal trust structure is a complex area of the market and one where advice should be sought.
What Factors Impact Life Insurance Premiums?
Many people speculate about the various factors which impact life insurance premiums. While they may differ from person to person in general the factors which an insurance company would consider include age, gender, family/individual health history, smoking habits, hobbies and occupation.
Would My Parents Need to Disclose Existing Medical Conditions?
When applying for any life insurance, it is important to disclose any existing medical conditions. While in some cases this may bar an individual from taking out life insurance, it is more likely they will be offered a policy with restrictions.
For example, if they had an existing heart condition, then the insurance company may look to exclude death payments as a consequence of heart issues.
What if I Failed to Disclose Existing Medical Conditions?
In the event that existing medical conditions came to light which were not disclosed during the application process, the policy would likely be terminated.
The UK life insurance industry is very broad and deep, and there are very few situations which will not attract some kind of life insurance offer – no matter the underlying health issues. So, it is very important to be upfront and honest when making a life insurance application.
