When you have a family, you have people you can rely on and who rely on you. It’s a beautiful reciprocal relationship, but it comes with some obligations – notably including the responsibility to support your family financially.
Supporting your family financially means making sure there’s food on the table and the bills get paid, but it also means ensuring your loved ones will be OK if something ever happens to you.
One of the benefits of life insurance is that it is designed to provide a safety net for your loved ones if you die too soon.
For primary breadwinners, the importance of life insurance in replacing household income may seem obvious.
But what might be less obvious is how valuable life insurance can be for other members of the family, including children.
The death of any family member, regardless of age, comes with a big financial impact, often exacerbated by a temporary reduction in the earnings of grieving survivors.
Even more, whole life insurance policies provide both a death benefit and a risk-free savings feature – allowing a family life insurance policy to simultaneously serve two financial needs.
Indeed, life insurance for the family – and the whole family – can be a critical element of a household’s fiscal health.
Different Types of Life Insurance for the Family
Optimal family life insurance choices depend on the specific family members and the family’s overall needs and goals. Life insurance comes in two basic varieties – term and permanent.
Term Life Insurance
Term life insurance policies are straight-forward, traditional insurance policies. The owner of the policy pays regular premiums to the insurance company, and, if the insured individual dies during the policy’s term (typically ranging from 10 – 30 years), the insurance company pays out a death benefit to the policy’s beneficiary. If the insured lives through the term, the policy lapses without payment (though term policies can often be renewed at the end of the term, usually with an annual renewable term policy where the premium increases each year).
Permanent Life Insurance
Permanent life insurance policies, such as whole life and universal life, are a more sophisticated financial product that combines life insurance and savings.
Whole life is better than term in several aspects.
For example, like term life, whole life provides a death benefit.
Unlike term, though, whole life stays in place for as long as premiums are paid, and the premiums never increase.
Whole life policies also earn dividends and accrue a cash surrender value that gradually increases with each premium payment.
If a policy stays in place long enough, the dividends and cash value exceed the total premiums paid as the cash-value component grows over time.
The savings feature guarantees that a whole life policy has long-term value and is therefore whole life is an asset for retirement or other financial goals.
Life Insurance for the Primary Breadwinner
When the insured individual is the family’s primary breadwinner, life insurance is imperative for replacing income and avoiding financial devastation.
The death benefit helps the family continue paying the mortgage and other bills, and covers death-related expenses like funeral costs and final medical bills, while also providing a resource for large future outlays, like the kids’ college education.
Likewise, when the primary breadwinner dies, it is much more difficult for the surviving spouse to save for retirement. Life insurance provides an important safety net even if there are no kids or they are already on their own.
Term Life May Be Sufficient
If your only requirement is to protect your family’s finances if you die before your children reach adulthood, a term policy may be sufficient. As long as the term is long enough, and you won’t need life insurance after it lapses, a term policy is an economical way to obtain necessary protection.
On the other hand, if you want your life insurance policy to double as a tax favored retirement-savings asset – or if you need the policy to stay in place permanently with no premium increases – whole life is the better pick.
Of course, if the household has two breadwinners, they should both have life insurance coverage. The loss of half of a family’s income puts a big financial strain on the surviving spouse, and one income may be insufficient to support the family without a substantially decreased living standard. Life insurance helps make up for the lost income and removes some of the grieving spouse’s financial burden.
Life Insurance for Stay-at-Home Parents
It’s easy to underestimate the replacement cost of the immense financial value a stay-at-home parent provides for a family, even if he or she does not directly earn any income.
Whether it’s childcare, household chores, or home maintenance, a surviving spouse has to pick up the slack by either paying someone else to do the household work or doing it him or herself. And every hour spent taking the kids to baseball practice is one fewer hour the survivor can work outside the home.
Whichever way you look at it, the death of a stay-at-home parent puts an enormous strain on a family’s budget. A life insurance policy relieves some of the pressure on the grieving spouse and partially makes up for the financial stress of the loss.
One requirement when getting family life insurance on a working spouse and non-working spouse is that the non-working spouse has limits to how much life insurance they can get. And if the working spouse has no life insurance, the non-working spouse may not be eligible.
Joint vs Separate Policies
In selecting among the different life insurance policies, a couple has the choice between separate policies or one joint policy.
“Separate policies” just means that each spouse individually purchases his or her own policy, with its own premium payment and coverage amount.
A joint policy is a single life insurance policy covering both spouses under one premium.
Joint policies can either be “first-to-die” or “second-to-die” (also called “survivorship policies”).
A first-to-die policy pays the death benefit to the surviving spouse upon the first spouse’s death and thus helps the survivor in providing for the family.
Survivorship policies do not pay out until both spouses have passed away and are typically intended to cover final expenses and estate taxes or to provide an inheritance for the couple’s children or other heirs.
All things being equal, survivorship policies have lower premiums than first-to-die policies.
Joint policies offer the advantage of minimization and can sometimes come with a lower overall premium than separate policies, particularly if one spouse’s health status would result in a very high individual premium.
Permanent joint policies provide a couple with a jointly-held asset for retirement. Joint term policies are useful for parents in dual-income households.
Separate Policies = Flexibility
Separate policies offer more flexibility because they can be adjusted to each spouse’s situation.
If one spouse earns a higher income, the family can choose a policy with a higher benefit for that spouse.
Or, one spouse can purchase a whole life policy that doubles as a retirement-savings vehicle while the other opts for a term life policy safeguarding family income until the kids finish college.
Spousal riders provide a third option that makes sense for some families.
With a spousal rider, one spouse is the primary insured under an individual policy, but the policy piggybacks coverage for the second spouse through a rider that pays out in the event of the second spouse’s death.
Spousal riders require an additional premium and usually provide a smaller death benefit for the second spouse.
Most individual term life policies offer children’s riders providing a similarly reduced death benefit for a relatively small increase in premium.
Some insurers issue family life insurance policies that cover two adults under a single premium, both with the same benefit amount, and also cover any of the family’s children with no additional premium.
The children’s coverage is much lower than the parents’ – usually about ten percent of the policy’s face amount.
Family policies along these lines may be a particularly good deal for large families because the premium usually doesn’t increase with more children, but the policies are only available for term life insurance coverage.
Life Insurance for Children
The conventional wisdom used to be that life insurance for children is unnecessary because kids don’t earn income that needs to be replaced. While this may have been true in earlier times, the argument misses two important factors in a modern family’s financial life.
First, the death benefit provided by life insurance does a lot more than replace income. In the tragic event of a child’s untimely death, the parents will face significant expenses for final medical bills and burial costs at the absolute worst time to put a strain on the family budget.
Even more, the grieving parents will need to miss at least a few weeks of work while they attempt to come to terms with the loss. Life insurance helps to compensate for the reduced income.
And the second, similarly important factor is that children’s policies are usually whole life policies that build cash value.
The death benefit is available if tragedy strikes, while the cash value steadily accrues throughout childhood. The policy then becomes a valuable financial asset giving the child a leg up upon reaching adulthood.
Because children are less likely than adults to die early, the policy premiums may be lower than a comparable whole life policy covering an adult, making the cash value component an even more attractive option and an essentially zero-risk financial product.
When the time comes for the child to leave home, the parents can transfer ownership of the policy to the child, who can then use it in a variety of ways.
He or she can simply keep the policy in place (a big benefit if the policyholder would otherwise be difficult to insure).
If the policy has been in place long enough to be “paid up,” it won’t require any additional premiums.
Alternatively, the policy can be surrendered or borrowed against and its cash value tapped for college, job training, a vehicle purchase, or a down payment on a home.
Or, the cash value can be converted into an annuity or into another life insurance policy through a 1035 Exchange without any current income tax on the policy’s growth.
Albert Einstein offered the heartening instruction to “rejoice with your family in the beautiful land of life.” Einstein wasn’t exactly talking about life insurance.
But his point about the importance of family relationships in personal happiness is well-taken. We all want to care for our families financially and help them take care of themselves. An advanced planning professional at I&E can assist you in deciding how family life insurance can help accomplish that goal.
Even if you’ve already applied for life insurance or you’re currently working with another life insurance agent elsewhere, we would encourage you to give us a call and experience the I&E difference, we think you’ll be pleasantly surprised with the way that we do business!