Life Insurance For Parents
Having a child is one of life’s rare moments that you voluntarily look for insurance. You know you need life insurance to provide security for your family. However, you may not know where to start or you may be unsure of the type or amount you need.
Below is a guide to help you understand life insurance, why you may need it, and how much coverage is necessary. With that, here is your unbiased life insurance guide.
Do you need life insurance?
If you provide financial support to anyone you probably need life insurance. This will supplement or replace the financial support you provide even after your death.
Here are a few types of people who life insurance is intended to help:
- Young children
- A spouse or partner who would struggle to pay bills and save without your support
- Co-signors and joint holders of debt who would be responsible for paying it back if you die
- Care taking of parents or grandparents
If a parent stays-at-home they need to have life insurance too. Even though a stay-at-home parent may not earn an income, the things they do every day would cost money to replace. Also, consider the adjustments the working spouse will have to make and it is very likely they will need to take additional time off from work. The list of extra duties may include childcare, transportation of kids to and from, housework, taking care of an elderly parent or grandparent, etc.
Instances where buying life insurance may not be necessary are
- if you have saved enough to support your family
- if your children are grown and support themselves or
- if you don’t have significant debt.
How much life insurance do you need?
This is the hardest part to figure out because there are so many factors and uncertainties. Some of the questions can be easily answered while others require more consideration. To help answer this question many people use online calculators. I have used them too but they have their shortcomings because they leave out important information. Only use them to get a general idea of how much life insurance you may need.
Here are the basic questions along with the ones the online calculators miss:
- How many years of income do you need to replace?
- How much is saved in your retirement accounts, savings, etc.?
- What amount will cover your lump sum needs and wants? These may include:
Debt: house, car loans, credit card debt, etc.
End-of-Life Expenses: burial/cremation costs
Education: the amount you would like to leave for your children to attend college
- How much money will you receive from Social Security?
Most online calculators don’t figure Social Security benefits into the equation. A large portion of your life insurance need may be covered by Social Security and you would begin receiving benefits immediately.
To find out how much money your family would receive, log in to the Social Security website and look at the “Survivors” area. Three numbers will show you the benefit paid for each child, the spouse, and total family benefit. These numbers are on a monthly basis so you need to multiply them by 12 to get the annual amount. Benefits will be paid until each child reaches age 18 or as long the surviving spouse is unmarried.
What is the best type of life insurance for your family?
Term life insurance
The most basic form of life insurance is called term life insurance. You buy the coverage for a set number of years – typically 10-30 years – and once that period is over the insurance will end. Most of the time, a term-life policy is the most appropriate type of life insurance to buy. It is the least expensive and can be used to cover only the necessary time a family needs.
Permanent Life insurance
This type of insurance covers your entire lifetime. Whole life and universal life are the most common types of permanent life insurance.
Here are a few reasons why permanent life insurance is usually not the best choice:
- Cost – Permanent life insurance often costs 8-12x more than term life insurance for the same amount of coverage.
- Need – If you’re saving for the future, you eventually won’t need life insurance anymore since your children will be able to support themselves and you’ll be financially independent.
- Conversion – Most term life insurance policies allow you to convert some or all of your coverage to permanent life insurance down the line, so if the need truly arises you’ll be covered.
- Investment – Many insurance agents will sell whole life insurance as an investment, but the truth is that it’s almost always a bad investment. You’re better off putting your money elsewhere.
Two instances when permanent life insurance may be more appropriate are if a family is ultra-high net worth or if a child has special needs.
How many years should you be covered?
If you choose a term policy you have to decide how long it should cover you.
- How long until your kids won’t need support
- If you are still having kids factor that in to the term you buy
- When will work be optional where you can retire
- When will the house be paid off or your business be free of debt
As we age, our coverage should decrease if we are saving the way we should. If that is the case, you may want to consider buying policies with different terms. This allows you to be covered for larger amounts earlier in life when you likely have more responsibilities and less saved. Later on you may not need to provide as much support and one of the policies is not necessary.
Buying Life Insurance
Now that you know the type and amount of life insurance it is time to make the purchase. There are four main ways to buy life insurance:
- Through your employer
- Online insurance
- Independent insurance broker
- Financial Planner
Through your employer
One of the biggest benefits of getting life insurance through work is that it’s easy and usually some portion is free. It’s usually as simple as deciding how much coverage you want, subject to whatever limits your employer has, and that’s it. It’s much, much easier than buying it on your own.
And if you have a pre-existing medical condition, getting life insurance through work may be your only choice, or at least your only affordable one. Since there’s no medical exam, you are guaranteed a reasonable premium that you may not be able to get on your own.
There are some downsides though.
- You may be limited in the amount of coverage you can get and it may not be enough
- More than likely you won’t be able to take the life insurance with you if you leave the job
- Your employer may suddenly decide to stop providing the coverage
- It may be more expensive than individual life insurance if you’re in good health
All of these issues are solved by an individual life insurance policy that you buy on your own. With an individual life insurance policy, you can get as much coverage as you need and the policy is yours as long as you continue paying the premiums.
You can certainly get some of each, and in some cases group life insurance may be all you can afford. But in terms of pure protection, an individual life insurance policy is better.
Online insurance broker
The big benefit of using an online broker is convenience. You can at least start the process online and these companies are doing everything they can to digitize the process as much as possible.
Look at websites like SelectQuote or PolicyGenius to get quotes from multiple companies so you can compare.
Independent insurance broker
Finding and working with the right independent insurance broker can be beneficial.
- They can help you decide how much life insurance you need
- Find a company with the right combination of price and financial stability
- Help with the application process
Search online for an independent life insurance agent in your city and then ask some questions to get a feel for how they will work with you. Be wary of someone that immediately suggests high dollar policy amounts without understanding your needs and goals. Remember, they earn commissions for what they sell and the higher the coverage the higher the commission.
Fee-Only financial planner
Working with a fee-only financial planner is a good option for these two important reasons:
- They are a fiduciary that will provide unbiased advice that considers your entire financial situation. This means the recommendation will be tailored to your specific goals across all aspects of your household finances.
- A fee-only planner means they don’t earn commissions. This is helpful to you because they don’t have an incentive to sell you more insurance than what you need.
One downside is that it will likely cost you more than the other options, since you’ll be paying for the advice on top of paying for the insurance policy. However, they will likely help you avoid overpaying or buying too much insurance.
Make sure you know that you are working with a fee-only financial planner. Sometimes an insurance broker is also a financial advisor. They may say they are fee-based but this just means they can earn a commission and a fee at the same time. They don’t have to put your best interests above their own.
Life Insurance Overview
Here are the main takeaways when considering life insurance:
- Determine how much coverage you need.
- Sign up for any free coverage your company offers.
- If you have pre-existing conditions that make it difficult or too expensive to buy a stand-alone life insurance policy, try to buy additional coverage through work.
- To get started with individual policies, go online to get quotes. This will give you a basic idea of what you may have to pay for the amount of coverage you need. SelectQuote or PolicyGenius are good resources.
- If you have a complicated medical history, consider working with an independent insurance broker or fee-only financial planner who can help you navigate the process.
- If you’re looking for financial advice for all your personal finances, including your life insurance needs, consider working with a fee-only financial planner.