7 Steps To Help Your Parents Avoid Expensive Life Insurance Mistakes


Do your parents have life insurance policies? Are the policies still in force? How much are they paying for these policies? Do they still need them? These are all questions that you must answer to determine what to do with your parents’ life insurance. Follow these seven steps to make sure you and your parents make the right decision.

  • First you must find the actual policies. If you cannot find them and your parents insist that they have life insurance, contact the companies and ask them for duplicate copies. Make sure the policies are still in force. Any defunct policies should be destroyed to avoid confusion later.
  • Review the policy to determine who the owner is.The policy may be owned by your mother or father but cannot be owned jointly. 

  • Determine the beneficiary or beneficiaries. Usually a beneficiary statement is attached to the policy. If the beneficiary was ever changed a new beneficiary statement should have been sent to your parent as owner. The owner can change the beneficiary at any time. Each policy has a provision for primary beneficiaries and contingent beneficiaries. If the primary beneficiary is not alive proceeds would go to the contingent beneficiary. Each Policy may have multiple primary and contingent beneficiaries. Make sure the beneficiaries are listed as your parents want them. If not ask them to contact the company to get forms to change the beneficiaries. Make sure they always list a contingent as well as primary beneficiary to any policy.
  • Determine the face amount and cash value of the policy. If it is a whole life or universal life policy there will be a dollar value listed as the cash value. The face amount is the amount that will be paid tax free to the beneficiary when the insured dies.The cash value is the internal buildup of cash that is accumulated in the policy. A portion of the cash value may be borrowed or paid out if the policy is surrendered.
  • Review with your parents the purpose of the policy.  Was it set up to pay for a debt, cover final expenses or provide an income for a survivor? Is it still needed for that purpose?
  • Determine the premiums (annual cost) of the policy. If your parents can no longer afford the premium or just don’t want to pay it they have several options. Most whole life policies pay dividends. These dividends can be used to pay the premiums. If it is an old policy it is very likely that the dividend will cover the entire premium. Cash can be borrowed from universal life policies at a relatively low cost to pay future premiums. Ask the servicing insurance agent to show you illustrations for various options.
  • If your parents have clearly indicated they no longer want the policy, they have several choices to make. They can list an organization that they support such as a religious group or a charity as the beneficiary of the policy. When they die a gift will be made to the charity for the full face amount. They can change the beneficiary to a child or grandchild to pay for future education costs. Or they can sell the policy to certain organizations that will pay them a future income or cash amount based on the value of the policy. The least advantageous way for them to eliminate the policy is to just surrender it. If they do so they will have to pay income tax on the difference between what they paid in premiums vs. what they received when the policy was surrendered.                                                                                                                                                                                                    It is important that you spend the time and effort to help your parents make the right decisions regarding their life insurance. It can make a significant difference in their financial situation.
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