Life insurance, a contract between an insurance policy holder (you) and an insurer (company), can be a good way to secure the financial foundation of your loved ones in the event that something tragic happens, causing your untimely death. Depending on the contract specifications, the insurer will pay a beneficiary, designated by you, a sum of money if you were to die. Because purchasing life insurance is an important decision both for both your family’s future and your current income, you should know what are the best options available. There are two basic types of life insurance: Term life and Whole life. Here are the pertinent facts about life insurance: What is it, and should you have it?
- Whole Life Insurance. Whole life insurance is a policy type that remains effective for the entire lifetime of the insured, provided the premiums (payments) are being paid. Falling under the blanket of permanent life insurance, Whole life (and similarly, Universal life) insurance are typically comprised of two parts: a savings portion, and an insurance portion. Because Whole life policies are guaranteed to remain in effect as long as the required payments are made, these premiums are typically much higher than with the alternative, Term life insurance. Not only can Whole life insurance be costly, but it is a poor investment decision. This is mainly because your loved ones probably won’t need insurance coverage for their entire life, but rather just to the point where they can comfortably provide for themselves. You would be wiser making monthly payments into an IRA or investment account, which will have much lower fees and added tax benefits.
- Term Life Insurance. The simplest form of life insurance, Term insurance pays out a sum of money only if your death occurs during the term specified in the policy, typically anywhere from one to thirty years. Most Term life insurance policies have no additional benefits. The concept here is that if something happens to you, there will be a lump sum payout to sustain your beneficiaries until they can support themselves. The premiums are much more affordable, and you can therefore provide a lot of financial coverage for your loved ones. How much Term life insurance you need can vary depending on your age, disposable income, and the standard of living that you want to ensure for your dependents. It is a good rule of thumb to get a thirty year term policy when your children are young with at least $500,000 coverage per minor child. The premiums will be affordable and your kids will be locked in for the duration of the term. If you have a stay-at-home spouse but no minor children, a good rule of thumb is to get enough insurance coverage to allow your spouse to get trained to re-enter the workforce and be self-supporting.
Choosing the right type of life insurance is a critical step to ensure the financial foundation for your family. In general, it is not worthwhile to get insurance on behalf of your children. You don’t need a payout if something happens to any of them because you aren’t relying on them for financial support, and the lump sum payout is generally small.
A word of caution: no matter what type of life insurance you have, do not name minor children as the beneficiaries. Minor children cannot receive money such as a life insurance payout, and the money will be tied up in court while the court figures out who should manage the money on behalf of your children. Generally, the best way to leave life insurance proceeds to minor children is to have a living trust, and name the trust as the beneficiary instead of the child or children. The trust will hold the money on your children’s behalf and you designate who will be in charge of the money and for what purposes it may be used until they reach the age that you decide they should receive the remaining cash (if any). The second best option is to name someone who you trust implicitly to use the money only on behalf of your children, and whose judgement you trust in terms of what to spend that money on and how much to spend. For a lot of people, this is a spouse, and/or the other parent of the child. But there are plenty of situations when that isn’t the most appropriate choice, and you may prefer to name your parent(s), or a trusted sibling like your children’s grandparents or aunt/uncle.
To put together the best financial protection package for your loved ones, you should consult with a knowledgeable attorney. Julie Richardson provides a multitude of services which include estate planning, living trusts, wills, powers of attorney, and protection planning for children. As a divorced mother of a ten-year old, she knows the importance of life insurance, and has a Term life policy for her own son. She doesn’t sell insurance and therefore has no financial interest in pushing you to purchase a life insurance policy that isn’t right for you, but she does work with trusted people in the life insurance industry who can help you buy insurance coverage if you decide to do so. If you are in the Modesto, CA area, contact Legal Pathways online or call us at (209) 529-1085.
As a bonus for back to school time, if you have minor children and you contact us in September to book an appointment, we will give you a $300 credit towards an estate planning package.