As a follow up to my post last week about having a will, all parents should also have life insurance. Again, not a fun topic to discuss, but a necessary one.
What is Life Insurance?
According to Fidelity’s website:
A life insurance policy is a contract with an insurance company. In exchange for premium payments, the insurance company provides a lump-sum payment, known as a death benefit, to beneficiaries upon the insured’s death.
Life insurance works similar to your auto insurance in some ways. You are paying a premium amount to have coverage in the case of an accident. The difference with life insurance, though, is you are choosing beneficiaries who will receive the amount of the insurance in the event of your death.
Beneficiaries are the people that you designate as those who receive your life insurance money in the event of your death. Typically, your spouse is listed as your primary beneficiary. The primary beneficiary is the person who will receive 100% of your health insurance. Most plans also have contingency beneficiaries, which is usually the place to list your children. Mine is set up to go to Justin as my primary beneficiary, and if he isn’t here still, it gets split 50/50 between my two boys. We didn’t get life insurance until I was pregnant with our first child. Before we had children, on my 401(k), I had my sister listed as my contingent beneficiary. Before I was married, she was my primary and my mom my contingent.
Term vs Universal vs Whole Insurance
Term insurance provides insurance for a specific period of time, such as 10 or 20 years, and the costs don’t change. After that time period, many plans have a continuation plan once the original term is met, but at a much higher premium. Term life insurance is great for replacement of loss of income for working parents. Life insurance is paid out in one lump sum rather than in paychecks, so the beneficiary needs to be able to manage their money well.
Universal insurance are permanent plans that allow the insured to raise or lower their coverage and premiums as needed. These are flexible plans, and are great for flexible estate planning. If you have the extra money, you can raise your premiums and coverage, but if money gets tight, you can lower it again. This way you always have coverage, and it varies based on what you are capable of putting into it.
Whole insurance are also permanent plans, but they are a fixed coverage and premium. These have higher premiums since they are lifelong coverage plans. The advantage to whole insurance plans are the added benefit of them having a cash value. This allows them to function as a savings as well and can accumulate tax-deferred money over time.
Income is Tax-Free
In general, most life insurance plans, when paid out to beneficiaries, are tax-free income. I know most people don’t want to leave their family with any financial burden, which is why they get a life insurance plan, so this is one less worry.
There are many factors that go into determining the cost of an individual’s life insurance premiums. There are different categories that are used, and they will effect the rate of your premium, but don’t usually effect the length of the plan or the coverage levels. Some of the factors include overall health, age, medical history, family history, and tobacco use.
Stay at Home Parents Need Life Insurance Too
It may seem like a good way to save money by foregoing life insurance for a stay-at-home parent, but that is not true. Yes, if you have one parent that works, and another who doesn’t, then losing the working parent’s income would be hard on the family. But imagine if the stay-at-home parent is suddenly not there. Now the working parent has to find a way to replace everything that the stay-at-home parent did. Day care or babysitter. House cleaner. Laundry. Meals. After-school activities. Driving the kids around. Raising the kids in general. A stay-at-home parents has just as much worth as the working parent.