Whose life will be insured and for how much?
Buying life insurance is a very easy way to pay smaller amounts for premiums and leave a larger sum of assets, income tax-free, to be available for your child’s lifetime needs after you die. But it is critical to purchase the proper type of insurance from a high-quality issuer and to be sure to cover the correct people.
Don't overlook the caregiver & advocate.People often assume that the parent (or other adult) who earns the most money needs the most life insurance. In two-parent families, many times one parent is the primary wage earner and one parent, even if employed full-time or part-time, is the primary caregiver of the children. This often is the case with families having a child with disabilities. One of the most common errors families make is to purchase life insurance only on the wage earner. while foregoing insurance to address the cost of replacing the person’s care provider and primary advocate.
To effectively plan using insurance, it is important to carefully consider some questions:
How much insurance do you need?
Every family situation is unique and there is no one magic number that suits everyone. The expertise of a professional may be needed to provide guidance in developing your life insurance needs over the course of a lifetime. Insurance companies have developed online calculators that are good tools to get you started before having a conversation with a financial professional. First, gather your data.
Begin with making a list of your family’s needs and living expenses, including the projected cost of insurance premiums. What you can afford in premiums will have a big impact on the type of insurance you use in your planning.
Step 1- To help you prioritize what amounts are needed, during what time periods, and what goals are most important, it is helpful to categorize needs and living expenses for your family into 4 categories:
- Immediate lump-sum needs- e.g. burial expenses, taxes, paying off the mortgage or debts, and keeping a cash cushion for about 6 months of emergency reserves to give your family time to make decisions and the ability to meet expenses.
- Income for your family’s lifestyle needs- e.g. your essential expenses, additional childcare or home care, maintenance and repairs for your home.
- Future goals for you and your entire family- e.g. funding for a portion or all college tuition for all children, perhaps a wedding or a down payment on a home, paying off your existing mortgage or providing for the surviving spouse’s retirement income needs.
- Supplemental expenses for your child today and in the future
Step 2-Put together a picture of your family's total resources. These include income from earnings and benefits for both parents and children and an inventory of parents' assets and your child's assets.
Step 3-To determine the net need for your family to maintain their lifestyle and future goals, subtract the resources that will be available at the death of a parent. This is the amount of money needed from life insurance.
Should Term and Permanent Insurance be combined?
Often, it is cost-effective to combine different types of life insurance for different types of needs. Your need for life insurance may change overtime and it is good to review the amount and type of coverage you have as you build savings.
Term life insurancemay be indicated to provide protection in the event of loss of income, paying off mortgage balances, providing for college and retirement goals, or providing for other goals that will likely be pursued over time if the parent continues to live. Term life insurance, which has lower premium costs, but provides a higher death benefit coverage than a permanent insurance product.
However, if you are planning for a child with special needs, those support needs are not temporary, and likely will be permanent. This requirespermanent life insurance protectionto last throughout the parent’s lifetime and pay out after your death. It is often ideal to have a combination of term and permanent coverage, for example, purchasing a lower amount of death benefit with a permanent policy, to keep premiums manageable, and purchasing a larger amount of death benefit coverage in a term policy that has lower costs.
Second-to-die life insurance or survivorship life insuranceis a type of permanent life insurance coverage that insures two people and pays the death benefit at the death of the second insured person. The premiums are significantly less than they would be for two traditional insurance policies, because the policy insures two lives but only pays, upon the death of both insureds, one death benefit. For older individuals with some health considerations, this may be a viable option for coverage. Second-to-die insurance is often used by families caring for an individual with disabilities because the major concerns usually develop at the death of the second parent (or caregiver). This is the time when money is often needed the most.
If your family receives a large windfall or significant inheritance, you may not have to use insurance to cover the cost of your child’s lifetime supports, but it still may be worth exploring for other uses such as estate taxes.
What Do I Do With Existing Policies?
Every 5 or 10 years it makes sense to review your existing life insurance policy or policies to make sure they still apply to your current needs and goals. Review the policy you purchased and see what it looks like now as compared to the sales illustration used at the time of purchase, specifically the estimated and/or guaranteed premium payments, cash values, death benefit amounts, and any riders that are available each year.
To see what has changed, if anything, request anin-force illustrationfrom your insurance agent or directly from the insurance company. The in-force illustration will provide you witha current snapshot of what your policy values are right now and what they will look like in the future.As part of your review, ask these questions:
- Will the death benefit lapse at some point?
- Will I need to increase my premium payments?
- Will the dividends be enough to pay for the premiums?
- Do I have an outstanding loan on the policy? If so, how will I be able to pay that off or how will it affect my policy over the long term?
- What options or riders do I have on the policy, and are they still appropriate?
