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 donâ€™t. Itâ€™s an important financial tool for virtually all parents, both married and single, of young children. But a study turned up a misconception.
While 82% of respondents to a survey said married people withÂ a young child orÂ children need life insurance, only 60% said single people withÂ 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.
â€śThere doesnâ€™t seem to be any obvious logic to it,â€ť says Todd Silverhart, corporate vice president at LIMRA. â€śThereâ€™s no question that the actual need for life insurance by single parents is, at a minimum, equal to married parents, if not greater.â€¦Single parents are vulnerable.â€ť
In another 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.
If anyone would be hurt financially by your death, then you need life insurance. This is the case even if you donâ€™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 policyâ€™s beneficiary, who is named by the person who buys the coverage. There can be more than one beneficiary.
There areÂ two main types of life insuranceÂ â€” 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 itâ€™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 insuranceÂ and other types of permanent policies cover you for your entire life. They also include a savings component known as â€ścash value,â€ť 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. Itâ€™s best to work with a financial adviser if youâ€™re interested in permanent coverage.
Think about your kidsâ€™ financial needs to decideÂ how much life insurance to buy.
â€śItâ€™s a very personal, individual exercise,â€ť says Brian Madgett, vice president at New York Life Insurance Co.
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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 youâ€™d like to replace. Add long-term expenses, such as college tuition or the cost of a childâ€™s future wedding.
When buyingÂ term life insurance, choose a term that lasts until the youngest child has graduated from college.
â€śBuy now before it gets more expensive,â€ť Madgett says.
The younger and healthier you are, the cheaper the coverage.
Take care in naming the beneficiary. Life insurance companies cannot pay money directly to minors. If naming your children as beneficiaries, youâ€™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 youâ€™d want, Madgett says.
Another option is to work with an attorney toÂ set up a trustÂ 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.
â€śWith a trust, youâ€™re in control even though youâ€™re not living,â€ť Madgett says.
Although 18-year-olds are legal adults in many states, most parents wouldnâ€™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.
Barbara Marquand is a writer at NerdWallet. Email: [email protected]. Twitter: @barbaramarquand.
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