Elderly parent wishes to buy life insurance for his children to inherit. Should he or his children buy it?

He is determined that this is a good way for them to have an inheritance since he is 80 yrs old and ill. Since the cost is prohibitive is it possible for one of the adult children to take out a policy on him and name himself & other siblings as beneficiaries?

How does that work exactly?

First of all, there are a couple of things to consider, one he is not exactly at an unisurable age, but "ill" does not sound good for his situation. If he is well enough to pass the physicals (ie blood and urine, as well as probably an ECG) then the question falls to does he fall under any potential estate tax liabilities? Currently he can pass upto $2MM estate tax free to his heirs, if he is married and they have the proper trust they can pass a full $4MM estate tax free and skip probate. If there is any tax liability two things may want to be done: 1) if insurable he may want to be insured, have the adult children be the owners, and he be the payor, gifting the premiums to the children. He is allowed to gift $12K per child/person for unlimited number of children/persons. He will get a deduction on his taxes for these gifts and he has until December 31st of each year to get this deduction.

2)The other idea would be to create a trust (if one does not already exist) and add an ILIT (Irrevocable Life Insurance Trust) and gift the premiums to the trust (same rules apply as before) and the trust would pay any estate taxes.

Another idea would be to use the Generation Skipping philosphy and take any monies in CD's or money market accounts, and buy a Gauranteed Lifetime Income annuity. Use a joint life with cash refund, where he and a grandchild (can be a minor) would be joint annuitants on the policy. While he lives he will enjoy an income stream, and if he doesn't need it, then he can again gift it to the grandchild, at his death the grandchild will continue to recieve the annual benefit at the same rate as Grandpa until his/her death at which time the named beneficiary (the grandchild's, grandchild) will inherit the cash refund portion of the annuity (the original premium put into the policy) free from probate.

Now to answer the question on how this all works exactly, is to first find out if you Elderly parent even qualifies for life insurance... this is going to depend as said before on his "illness." IF he does then the agent you are working with should be one who is a specialist in estate planning, because he/she will have to title everything correctly depending on which option you chose. If he does NOT qualify for life insurance, but still has a sizable estate, the idea is to spend down the esate as much as possible, by gifting or generation skipping.

80 years old and ILL?? Are you sure you are working with a broker who has placed his risk appropriately so far? If he is ill already, it may be harder than you think. If by "ill" you mean enlarged prostate, high cholesterol, arthritis, then this should be fine at his age.

The ownership issue is very involved and may involve the help of other advisors. The agent/ broker who is helping with the life policy should be able to help you with this. If they can't, don't give them the business. The agent will likely make a fair amount of money on this case. Make sure they work for you.

Paying a single premium should only result in a more attractive offer if he is sicker than you might think, and the face amount of the insurance is within the company's retention limits. This is all very technical, and that's why you need the help of someone who has handled this type of case before.

The parent will be the insured, regardless of who pays for the policy. However, this assumes he can even get life insurance in his current condition. At his age, it's not impossible, but if he's "ill" the likelihood decreases significantly.

In fact, he will likely find that there are only two options. One is to buy a small guaranteed issue policy (because the guaranteed issue ones are always for small face amounts.) The other is to try to buy as much coverage as the company is willing to offer him with a lump sum of cash to pay for the policy up front.

For instance, if he were in good health for his age, $100,000 paid up front in a lump sum might buy him $130,000 in life coverage. (And that's not a bad return on investment all things considered, especially when you take into account that the family may have to pay estate taxes of 25-50% on the original lump sum, but life insurance proceeds are tax free in almost all cases.) However, if he's in seriously poor health, it's highly unlikely he'll even qualify.

In the end, it doesn't matter who pays for the policy (although the payor will likely want to be listed as the policy owner, so they will have final say in any changes to the policy.) The question is whether or not it's even a viable option.

OK, the policy owner isn't going to affect the COST at ALL. So it will be the same if he is the insured, no matter who owns the policy.

Obviously, the adult children can't take out the policy without his permission and cooperation.

This is normally done this way, to avoid ESTATE taxes - if he's got millions he wants to pass along, without having it subject to state and federal estate taxes, what you do is pay the premium (usually the full million, plus an administration cost) to the insurance company, the policy is issued for the million, and the beneficiary is named.

*I* would recommend he owns his own policy, so if he changes his mind, he can change his beneficiary. Also, as it's HIS money paying for it, it makes sense that he's the owner.

If the kids think they're going to get cheap insurance on a sick 80 year old man, they're crazy. The odds are against him living even another year, he's going to pay the whole face value up front.

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