Becoming a parent is a huge responsibility. Your child depends on you for love and care – not to mention food, clothing, shelter and other practical needs. While it’s impossible to predict the future, securing life insurance can help provide for your children’s needs in case you’re not there as they grow up.
How much life insurance do parents need?
Although some life insurance is always better than none, it’s important to purchase enough coverage to meet your needs – which may be more than you expect.
For example, a policy with a death benefit of $100,000 may seem like a lot at first glance. Since life insurance benefits typically aren’t subject to income tax, your family would receive the full amount. However, some of the benefit will likely go toward funeral costs. The National Funeral Directors Association says the average cost of a funeral in 2023 is nearly $10,000. So, this means your family would have $90,000 left. How many years would that last them? Perhaps one or two years, maybe three or four if their expenses were low or they had some additional income.
There are two simple ways to get a basic estimate of how much your family would need:
- Multiply your annual income by the number of years you need to cover. For example, if you earn $50,000 a year and want to replace 10 years’ worth of income, you’ll need $500,000 in coverage. While a 10-year life insurance policy is fairly common, you may want to increase this number to 20 or 30 years, especially if you have young children.
- Add up the expenses that your life insurance benefit would need to cover and subtract any funds your family would have. Expenses may include funeral costs, groceries, utilities, insurance, mortgage and educational costs. Funds may include savings and income from a spouse.
Do SAHPs need a life insurance policy?
People often focus on using life insurance to replace lost income, but it’s also important to have coverage for stay-at-home parents (SAHPs), especially if you have young children.
For example, picture a young couple named Greg and Jamie. Greg works while Jamie stays at home with their infant son. They take out life insurance on Greg, but not on Jamie because money is tight. Jamie tragically passes away in a car accident. Greg now has to figure out how to take care of his son while working. Because money is tight, he can’t afford child care. He also goes into debt paying for the funeral.
A life insurance policy for parents who provide child care may alleviate the financial burden in situations like this. When determining how much coverage you need for a stay-at-home parent, calculate how much it would cost to pay for the child care, cleaning and other services that the parent provides, as well as funeral costs.
What type of life insurance should parents buy?
There are many options when it comes to life insurance policies, with each providing different benefits and available for different prices. With that said, there are two main types of life insurance.
- Term life insurance can be an affordable choice that provides coverage for a predetermined period of time, such as 10 or 20 years. This may be a great option for parents who want to protect their family but don’t want to spend a lot on insurance or deal with complicated life insurance policies.
- Permanent life insurance continues to provide coverage as long as the policyholder meets the premium requirements. It builds a cash value that the policyholder can access. The downside is that permanent life insurance tends to cost more than term coverage and may be more complicated. Two common types of permanent life insurance are whole life insurance (which provides stable premiums and benefits) and universal life insurance (which provides flexible premiums and growth based on the market).
If you buy a term life insurance policy now, you may be able to convert it to a permanent life insurance policy later. Just make sure you consult with your insurance advisor about when to do this, since you may have a limited window of time to take advantage of the conversion option.
Naming the Life Insurance Beneficiary
The person you name as the beneficiary of your life insurance policy will receive the death benefit if you die. This makes selecting a life insurance beneficiary a crucial decision.
If you are married, your spouse is the most logical beneficiary – your state’s laws may even require this. You may be able to name your children as beneficiaries, but doing so can be complicated because minors typically cannot take possession of death benefit. One option is to establish a trust for the care of your children and name the trust as the beneficiary.
In addition, you may like to name a secondary beneficiary or contingent beneficiary in case something happens to the primary beneficiary. For example, if you name your spouse as the beneficiary but you both pass away in a car crash, the secondary beneficiary will receive the death benefit.
It’s also important to regularly review your beneficiary designations, especially after major life events. For example, if you get divorced, you may not want to have your ex-spouse as your beneficiary (although the divorce settlement may influence whether it’s possible to change the beneficiary).
Are you and your loved ones protected?
If you’re a parent looking for life insurance, Higginbotham can help you explore your options. Whether you’re looking for term or permanent life insurance, we’ll help you find a policy that meets your needs. Talk to one of our life insurance specialists to learn more about our policy offerings.
