As parents, we strive to give our children the best life has to offer. From cooking nutritious meals for them to signing them up in school sports to providing payments for music lessons and summer camp. Every day is an opportunity to make our kids happy and healthy. But there are long-term considerations and plans that aren’t always top of mind for parents. And some moms and dads may forget—or even avoid—attending to them. Not surprisingly, one of them is pretty difficult to confront: what would happen to our children if we were to pass away?
We are aware of the emotional devastation the loss of a parent can cause. That’s something we can’t control. But we can avoid heaping more difficulties on top of the inevitable ones by planning carefully for the worst-case scenario. We need to choose loving, capable guardians for our children to care for them when we’re gone. We must make sure we leave our kids financially secure. That’s where estate planning—and more specifically buying life insurance—comes in. Having children makes purchasing life insurance a must. But what kind of policy do you need and how do you go about finding the best life insurance for your family?
Life Insurance Decisions
Parents aren’t all cut from the same cloth. We have diverse values and attitudes toward child-rearing. Some of us expect our children to become financially independent at a relatively young age. Others expect to put their kids through college and perhaps even pay for graduate education. How much life insurance you need depends, in part, on how long you want your children to have your financial support. But I think we can all agree that kids should be taken care of until they’re 18 years of age: old enough to graduate from high school, vote, and hold a steady job.
How old are your kids and how long will they need your financial support? How far do you want that support to take them? Some parents carry life insurance knowing that its death benefit can fund a college education or help their kids purchase a house, for example. Answering those three questions alone can help point you in the direction of the right kind and size of a life insurance policy.
Types of Life Insurance: Term and Whole
The first decision you’re likely to make when shopping for life insurance is the type of policy you need, term or whole. Both kinds pay a death benefit. Both require you to pay monthly premiums. But term life insurance is a temporary kind of coverage. You purchase it and agree to pay for it for a set amount of time (its term). When you stop paying for it, a term policy has no value. You can, of course, renew it for another term. When you’re young and healthy, term life insurance is relatively inexpensive. It will cost you less at age 20 than it will when you’re 40. Still, term life costs less than whole life and it may well suit your needs.
Whole life insurance is intended as a lifelong investment. But the primary difference between a term life policy and a whole life policy is that the latter accrues cash value before you die. A portion of every premium you pay goes towards building your wealth. Some policies accrue interest. Others pay a dividend. Still, others include a provision whereby a portion of your premium will be invested on your behalf—some quite aggressively. Once you’ve paid into a whole life policy for a while, you can borrow against it, too. If you don’t pay your premiums, your whole life insurance will automatically borrow from itself to keep itself in force. But be cautious about borrowing: any money you borrow from your policy will be deducted from the death benefit your kids receive if you die. And it won’t earn interest or dividends either.
But let’s say you’re fortunate. You keep your whole life policy until your kids are standing on their own two feet. They won’t need the large amount of money your policy’s death benefit provides. In that case, you can cancel your policy and its cash value is yours to use as you please. Buy a summer cottage. Fund a retirement account. Support a cause that’s near to your heart. You get to decide how that money can enrich your life. You can also leave it to an heir or heirs. That’s one more way life insurance becomes part of a comprehensive estate plan.
Customizing Your Policy
Life insurance policies are flexible financial instruments. You can tailor a policy to suit your unique circumstances by making certain choices. The first is the size of your policy. If you have young children who will need support for a long time, you may want to up your coverage limits. A million-dollar policy may sound like a lot to carry. But if you earn the median US salary (around $35,000), have a young child or children, and want to send your kids for college it’s not excessive.
Remember, your policy proceeds may need to pay your children’s expenses for a long time. The average cost of a four-year degree from a public university is nearly $100,000. Times that by the number of kids you have. Do you have a mortgage? Add in the cost of paying it until your kids are old enough to leave home. You can see how quickly a million-dollar policy starts to make sense.
The good news is that a $1 million, 10-year term life policy for a 25-year old mom in excellent health can cost under $35 per month. Again, buying life insurance when you’re young and healthy can significantly reduce your monthly premiums. One important note: smokers pay much higher premiums. That’s just one benefit of not using tobacco.
Another policy feature you may want to look into is the accelerated death benefit. Many policies include, but with others, you’ll need to add it as a special rider. An accelerated death benefit can be used if you become terminally ill or permanently disabled. If you have one in place, you can access the death benefit of your policy while you’re living: for example, to pay for medical expenses. A large policy could cover many of your expenses while you’re ill and still pay enough to take care of your kids for a long time.
Consult With An Expert
An experienced life insurance agent can help you determine how large a policy to carry and also shop around for the best policy price. An attorney who specializes in estate planning can help you decide whether you should name a trusted adult as a beneficiary of your policy or whether to create a trust that holds your policy. A financial advisor can help you figure out how carrying life insurance will affect your long-term wealth.
This isn’t to say you shouldn’t trust your gut. Buying life insurance is a personal decision. In the final analysis, you’re the only one who can decide what constitutes peace of mind—one of the less concrete, but equally important benefits of carrying life insurance—and what you’re willing to pay for it.