The Single Parent’s Guide to Life Insurance
March 23, 2018 by Barbara Marquand
This article was first published on NerdWallet.com.
Even though it might be hard sometimes to picture your young children as independent adults, you hope to live long enough to see that day.
Life insurance provides a financial safety net in case you don’t. It’s an important financial tool for virtually all parents, both married and single, of young children. But a recent study turned up a misconception.
Basic math
While 82% of respondents to a recent survey said married people with a young child or children need life insurance, only 60% said single people with a young child or children need coverage.
The finding was among the most surprising in the 2017 Insurance Barometer Study by Life Happens, a nonprofit supported by insurance companies and brokerages, and LIMRA, a global life insurance research and development organization.
“There doesn’t seem to be any obvious logic to it,” says Todd Silverhart, corporate vice president at LIMRA. “There’s no question that the actual need for life insurance by single parents is, at a minimum, equal to married parents, if not greater. … Single parents are vulnerable.”
In another 2017 survey by LIMRA, 55% of single-mother households said their families would be in immediate financial trouble if the primary wage earner died, compared with 35% of all U.S. households.
How life insurance works
If anyone would be hurt financially by your death, then you need life insurance. This is the case even if you don’t earn income. The services stay-at-home parents provide without financial compensation, such as child care and transportation, would have to be replaced, and those costs would add up.
Life insurance pays out if the person insured under the policy dies. The money goes to the policy’s beneficiary, who is named by the person who buys the coverage. There can be more than one beneficiary.
There are two main types of life insurance — term and permanent, such as whole life. Term life covers you for a certain period, such as 10, 20 or 30 years. It pays out if you die within the term. Term life is sufficient for most families, and it’s cheap. A healthy 30-year-old can buy $250,000 of coverage for 20 years for about $160 a year, according to LIMRA and Life Happens.
Whole life insurance and other types of permanent policies cover you for your entire life. They also include a savings component known as “cash value,” which grows slowly tax-deferred. After years of growth, the policy owner can borrow against the cash value or give up the policy for the cash value. Permanent life insurance is more expensive and complicated than term life. It’s best to work with a financial advisor if you’re interested in permanent coverage.
How much to buy
Think about your kids’ financial needs to decide how much life insurance to buy.
“It’s a very personal, individual exercise,” says Brian Madgett, vice president at New York Life Insurance Co.
He suggests first tallying up how much it would cost to pay off the mortgage and other debts. Then think about ongoing household expenses and the number of years of income you’d like to replace. Add long-term expenses, such as college tuition or the cost of a child’s future wedding.
When buying term life insurance, choose a term that lasts until the youngest child has graduated from college.
“Buy now before it gets more expensive,” Madgett says.
The younger and healthier you are, the cheaper the coverage.
Who will manage the money for the kids?
Take care in naming the beneficiary. Life insurance companies cannot pay money directly to minors. If naming your children as beneficiaries, you’ll also need to name an adult custodian on the policy to handle the money for their benefit, Madgett says. The children will receive any unspent life insurance money when they reach the legal age of adulthood.
If only the children are named, the court will have to appoint a custodian. That process will cost time and money, and may not result in the person you’d want, Madgett says.
Another option is to work with an attorney to set up a trust for the benefit of the children and name the trust as the beneficiary. When creating the trust, you spell out the rules for how the money should be used and name a trustee to manage the money according to the trust directions.
“With a trust, you’re in control even though you’re not living,” Madgett says.
Although 18-year-olds are legal adults in many states, most parents wouldn’t want their kids at that age getting a large sum of money. With a trust, you can have the money managed by the trustee until the children reach a certain age, such as 25 or 30.
