As a parent, you want to provide for your children. You likely have a budget for how you'll pay for their clothes, food, school, and other day-to-day needs. In addition, it's also important to have a plan should something happen to you unexpectedly, causing the family to lose your income.
A recent survey found that 42% of households would find it difficult to pay their living expenses (such as rent/mortgage, utilities, groceries, schooling) within six months of the death of their family's primary earner. This is at least partly because many families do not have life insurance. The survey found that only 52% of people in the United States were covered by some type of life insurance.1
If you're a parent, it's a good idea to buy life insurance in order to protect and care for your family, even in the event of your unexpected death. Here is everything you need to know about what life insurance is, how it works, and how it can protect your family.
What Is Life Insurance for Parents?
Parents buy life insurance to provide money to a beneficiary in the case of their death. This money can support your family in your absence to pay the mortgage, fund their education, or pay other day-to-day expenses that you used to cover with your salary. Usually, the beneficiary is your surviving spouse or one or more of your children.
How it Works
If you name your children as beneficiaries but they are minors when you die, the insurance company can't pay the benefit directly to them.
However, you can name a custodian or set up a life insurance trust to hold the money in your children's name. If you set up a trust, you will need to appoint a trustee to manage it according to your instructions to care for your children until they reach adulthood.
You can buy life insurance through an independent carrier or through your employer. Coverage amounts can vary from $10,000 to $10 million, depending on the insurer, your health, and your financial situation. To maintain your life insurance, you pay a monthly premium.
Types of Life Insurance for Parents
There are two different kinds of life insurance: term life insurance and permanent life insurance.
Term life insurance is temporary and only covers a set number of years. You can choose between 10-, 20-, or 30-year terms. If you die anytime before your term is up, your beneficiary receives your full death benefit.
Permanent life insurance lasts your entire lifetime, but it is generally more expensive. Your beneficiaries receive your death benefit when you die, but there is usually also a cash value. The cash value is a separate saving component of your plan that you can borrow against if needed while you are alive.
Why You Need Life Insurance
It's no secret that it's expensive to raise a child. According to recent estimates, it costs approximately $233,610 to raise a baby to the age of 18, though this amount varies based on where you live and your lifestyle. If you were to pass away, your family would lose your income, affecting their ability to pay the rent or mortgage, buy groceries, pay for daycare, and handle other day-to-day expenses.
This is why life insurance is important for families: it helps cover these financial costs during your kids' formative childhood years in the event of your unexpected passing. Depending on your plan, your life insurance death benefit can also cover some or all of the costs of your children's education, including college.
Both Parents Should Get It
It's a common assumption that only working parents need life insurance because they are the ones that provide a salary to support the family.
However, stay-at-home parents should consider getting life insurance because, while they may not earn a paycheck, they do a lot of work to care for their children. If that parent were to die, it is unlikely that the surviving, working parent would be able to maintain that care on their own. Instead, they would need to find alternate daycare and household help, which costs money. Life insurance could help pay for this support.
How Much Life Insurance Do I Need?
Life insurance benefits are meant to replace any income you would have contributed to your family if you hadn't died. How much that is, of course, depends on your unique circumstances, but here are some expenses to factor in when looking at plans and calculating how much you need:
- Your financial contributions (e.g. your salary)
- How much you want to save for your child's education
- Childcare costs (if you don't have childcare now but you are a stay-at-home parent, calculate how much childcare would cost to replace the work you had been doing at home)
- Your mortgage or rent costs
- Family expenses or bills
- Other child-rearing expenses (such as extracurricular fees, camp fees, music classes)
- Death taxes and funeral expenses (optional)
Life Insurance Is More Affordable Than You Might Think
It is common for people to overestimate how much life insurance costs, which is why families tend to opt-out of buying it. For example, in the survey mentioned earlier, 44% of Millennial respondents greatly overestimated the cost of term life insurance for a healthy 30-year-old.
The truth is, life insurance policies are much more affordable than you might think, especially if you buy a term life insurance plan.
The Cost
Most life insurance premiums are between $100 and $550 per year—which amounts to a fairly low monthly fee.
How Life Insurance Is Priced
The annual price of your life insurance depends on what policy you buy, what company you buy it from, the coverage amount, and the length of the term. But other factors that affect the price include:
- Age: The younger you are, the less you pay
- Sex: People assigned female at birth generally pay less
- Health: If you are in good health, you pay less
- Smoking habits: Non-smokers pay less
- Lifestyle: People with risky careers or that engage in risky hobbies pay more.
When To Buy Life Insurance
The younger you are, the more affordable life insurance is to purchase. Quotes tend to go up every year you wait because you are more likely to have a pre-existing condition and/or declining health, two factors that can raise your monthly premiums.
In addition, some insurance carriers allow plans to be purchased without a medical exam if you are under the age of 50 and healthy.
As a parent, buying life insurance early also protects your children financially earlier in their childhood.
Work-Provided Life Insurance Isn't Usually Enough
Many employers provide life insurance. This is called group life insurance.
These plans also may not fully cover your family's financial needs because they usually cover one or two times your annual salary. This could leave your family vulnerable within a year or two of your death.
It is true that you can usually purchase additional coverage at a group rate to protect your family for a longer period of time. However, most employer-provided policies are not portable so if you were to lose or switch your job, you would also lose this life insurance.
As a result, even if your employer offers group life insurance, you will likely want to purchase insurance through an insurance agent, or civic organization.
If you're a veteran, you may also be able to buy life insurance through the VA's life insurance program.
Should I Buy Life Insurance for My Child?
The decision is ultimately up to you and what you can afford. However, there are a number of reasons why you might want to also purchase life insurance for your child.
Not only can these plans help you pay for their funeral and other related expenses in the event of their untimely death, but they can also be an investment in your child's future.
Most children's plans only cover your child until the age of 18 or 21. At that point, they can be automatically switched over to an adult policy without an application, requalification, and regardless of their health. This can help you guarantee your child has life insurance in adulthood—and your child can always purchase additional coverage when and if they want to from there.
Children's life insurance plans can also be an investment in their future. Most plans offer a cash value—which is basically a savings account that builds up with a portion of the monthly premium you pay. Then, once the policy ends at the age of 18 or 21, your kids can use the money to pay for college, buy a house, start a business or pay for another life expense. They can also borrow against it.
Child life insurance plans are generally more affordable than an adult plan, with premiums as low as $5 to $10 in some cases.
However, some families choose to instead purchase other savings plans, such as 529 college savings accounts, as an investment in their children—and that's perfectly okay.
Understanding the Essence of Life Insurance
Life insurance serves as a robust financial safety net, providing a crucial foundation for your family's future. This article delves into the multifaceted reasons why life insurance is not just a prudent choice but a vital necessity for parents committed to securing their family's well-being.
Financial Protection for Your Loved Ones
The core purpose of life insurance is to offer a financial cushion to your family in the event of your untimely demise. The emotional toll of losing a loved one is already overwhelming; life insurance helps alleviate the burden by providing financial support. This can cover immediate expenses, such as funeral costs, and extend to long-term needs like mortgage payments, education, and day-to-day living expenses.
Ensuring Your Children's Education
As parents, we aspire to provide the best education for our children. Life insurance can play a pivotal role in ensuring that this dream doesn't falter, even if you're no longer there to see it through. By securing a life insurance policy, you create a fund that can be earmarked for your children's education, offering them the opportunity to pursue their goals and aspirations.
Maintaining Your Family's Lifestyle
The loss of a breadwinner can significantly impact the financial stability of a family. Life insurance helps bridge this gap, allowing your family to maintain their current lifestyle without plunging into financial hardship. From mortgage payments to daily living expenses, life insurance provides a safety net that preserves your family's quality of life.
Paying Off Outstanding Debts
Life insurance can serve as a crucial tool in settling outstanding debts. From credit card balances to outstanding loans, having a life insurance policy ensures that your family won't be burdened with financial obligations that could jeopardize their financial stability.
Peace of Mind and Emotional Well-being
Knowing that your family is financially protected provides immeasurable peace of mind. This sense of security can have a profound impact on your emotional well-being, allowing you to focus on creating cherished moments with your loved ones rather than worrying about their financial future.