Life insurance is meant to serve as a financial safety net for your family in your absence. The net, however, is not complete unless your family members are also insured.
Why is it important for you to have a life insurance plan for your family? What kinds of policies are best for your family? What are the factors you should take into consideration while buying insurance for your family? Let us find out.
Why Your Family Needs Life Insurance
If you have a spouse who works full time or part time, the answer to the question above is obvious. In a two-income family, couples pull their incomes together to manage household expenses and to save money for a rainy day. Even when the economy is stellar and taxes are lower there could be a rainy day.
If a source of income stops abruptly, the family might struggle to make ends meet. This is why both partners need to be adequately insured, so that if either one of them were to pass away, their income would be replaced by the insurance payout.
Now, what if you have a spouse who does not work and stays at home? Do they still need insurance? The short answer is – yes.
Even in households where the spouse does not work, they still contribute to the family in a variety of different ways. From housekeeping to cooking, childcare, and managing the day-to-day needs of the household, there are many services that a stay-at-home spouse provides that a family simply cannot do without.
If your spouse were to pass away, you might have to hire professional help for the essential services mentioned above, which could be costly. So, a life insurance payout in these types of cases could prove to be extremely beneficial.
This is why experts say that irrespective of the work status of your spouse, you need to make sure that they are adequately insured.
Why Your Children Need Life Insurance
This again is a question that often pops up while discussing the subject of life insurance. It is a valid question too, since the ‘loss of income’ logic and the ‘loss of services provided’ logic cannot be applied here. So, why do your children need life insurance? There are two critical reasons, actually.
As unpleasant as it is to think about it, you have to consider the costs to your family in the unfortunate event that your child passes away. The average cost of a funeral could be anywhere from $5,000 to $10,000. Moreover, after an untimely death in the family, you might need to take a break from work to grieve and piece yourself together with the help of therapy.
Some losses are worse than others – for example, if someone’s life is cut short. Most people understand that.
In these types of circumstances, a life insurance payout can help you cope with the loss of income resulting from your leave of absence and to pay for counseling, among other things.
If your family has a history of hereditary diseases and if you are worried that your children might develop a disease in the future, insuring them at a young age might be judicious. It ensures that your children are protected while they are growing up. When they are fully grown, they might be able to increase their coverage as well.
It just depends on their predilection.
The Best Policies for Your Family
When it comes to insuring your spouse, you have two options. You can either buy a separate policy for them or invest in a joint life insurance policy that covers both of you.
Separate Policy for Your Spouse
A term policy offers cheap life insurance while providing a guaranteed death benefit. On the downside, it only covers your spouse for a limited period of time, after which it needs to be renewed again at a higher cost.
A whole life policy covers your spouse for an entire lifetime and provides a guaranteed death benefit. In addition, it also offers living benefits in the form of cash value and in some cases, dividends. On the downside, it is more expensive than a term policy.
Joint Life Policy for You and Your Spouse
When it comes to joint life policies, your options are mostly limited to permanent life policies. They have a cash value account which earns a modest interest. Some policies might also offer dividends.
There are two types of joint life policies available – first-to-die policies (death benefit is paid out after the death of the first policyholder) and second-to-die policies (death benefit is paid out after the death of both the policyholders).
A joint life policy is generally cheaper than buying two different life policies for you and your spouse. On the other hand, it might not provide you and your spouse with adequate coverage. Similarly, an individual policy can be tailored to your own needs, which might not be possible with a joint life policy.
Covering Your Spouse through Riders
If you cannot afford a separate policy for your spouse or if you think that it is not needed, you can still insure them with the help of riders.
Many life insurance policies offer ‘additional insured’ riders, which allow you to buy additional coverage for your spouse. These riders usually have level premium for a certain period of time, after which the rates increase gradually.
Buying Life Insurance for Your Children
You have two options when it comes to buying life insurance for your children – purchasing a specialized child life policy or adding a child rider to your own policy.
Many people make the mistake of buying a specialized child life policy, which in most cases is a permanent life policy.
They think that the money in the cash value account could be used for their children’s education as they grow up. Most whole life policies, however, only pay a modest rate of interest, which means the amount is not likely to cover your children’s educational expenses.
Adding a Child Rider to Your Term Policy
If you have a term policy, the best way to get your children insured is to purchase a child rider. The average child rider allows you to buy $1,000 of coverage for $6. Many policies allow you to cover all your children (if you have more than one) by purchasing a single rider without having to pay extra premium for each child.
The average child rider for a term policy could buy anywhere from $10,000 to $25,000 of coverage. It expires when your children reach a certain age – it could be 18 to 25, depending on the insurance company.
Also, when the rider expires, your children will have the option to convert it into a permanent life policy, since most insurance companies offer the option.
This is a much better option than buying separate policies for your children, since it costs you very little and provides you with sufficient death benefit for end-of-life costs. At the time of expiration, it can be converted into a permanent life policy which can provide a lifetime of protection to your kids, with a much larger death benefit.
Choosing a Coverage Amount
There are a few key factors you need to consider while determining the amount of coverage you need for your family.
Loss of Income – This is the first thing you need to consider while buying life insurance. If you or your spouse (if they work) were to pass away, will the payout replace your income for a period of time? What period of time? Experts recommend that your policy’s death benefit should be at least 5 to 10 times your annual income.
Debts – If you have debts that need to be paid off – mortgage, personal loan/s, business loan/s, or credit cards – you need to make sure that the coverage amount is sufficient to pay off all the debts or as much of the debt as possible.
Children’s Education – If you have young children, you should choose a policy whose death benefit is sufficient to cover the costs of sending them to college.
Elderly Care – If you have parents who require professional care and are dependent on you, you need to take those costs into account while calculating the coverage amount you need.
Choosing the Right Insurance Company
Choosing a trustworthy insurance provider with a proven track record is pivotal while insuring yourself and/or your family. Given here are the factors to be taken into account while looking for an insurance company.
This is a make-or-break factor when it comes to choosing an insurance provider. Life insurance is a long-term commitment, so the financial stability of the company is the factor that matters the most. It is prudent to choose a company that has consistently received ‘A’ ratings from agencies like Moody’s, S&P’s, Fitch, and AM Best.
Range of Products Offered
When it comes to life insurance, each individual has their own needs. Based on this, the company you choose should offer a wide range of policies as well as riders that can adequately cover your family’s financial needs.
Not all insurance companies charge the same rate for the same kind of policy. That is only logical right?
The premium usually differs from one company to another – for the exact same policy – owing to the underwriting guidelines followed by each company. So ask for personalized quotes from several companies and pick one that suits your budget.
This is a critical factor to consider while choosing an insurance provider. A company could have the best products, but if its customer service is not up to the mark, your family might have a hard time with the claim settlement process. Therefore, look for a company that treats its customers well and responds to their complaints in a timely manner.
Insuring Your Family – A Necessity
Insuring your spouse and children is just as necessary as insuring yourself. With that said, choose a policy with riders that sufficiently cover the needs of your family, including your children.
The Best Life Insurance For Your Family by Jonathan Holloway