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Family life insurance
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Family life insurance coverage can be custom-built to cover the members of your immediate family. Your insurance may include both term life insurance policies, which cover a certain number of years, and permanent life policies, which do not expire but may carry higher premiums. Understanding your circumstances, options and objectives in advance can help you maximize your insurance benefit and find a plan that best suits your situation.
Why consider buying family life insurance?
Family life insurance may help to secure your family’s financial future if the unexpected occurs. Family life coverage is not made up of a single policy, but rather involves a custom assembly of policies to include everyone in your immediate family. A family member’s death benefit may be used to cover costly funeral expenses, but it may also be used to cover major outstanding debts or help replace income in the event one or more family members pass away.
Some families opt to take out a term life insurance policy, which covers you and your loved ones for a period of time (usually 10 to 30 years) and may be priced at a lower premium. Term policies are designed to pay out a death benefit if you pass away during the coverage time frame. If you don’t pass away in the predetermined window of time, your policy will typically expire and your beneficiaries won’t receive a death benefit. However, it is possible with some life insurance companies to purchase a conversion rider, which allows you to convert a term policy to a permanent policy at the end of your term.
Permanent life insurance, on the other hand, remains active for the duration of your life as long as premiums are paid. It’s typically much more expensive than term life insurance and comes with a cash value account that can gain interest and/or returns over the course of the policy. You may be able to borrow against this money, use it to pay your premiums or withdraw it from your account.
Buying life insurance as a parent
When you’re a parent, a life insurance policy provides a level of financial security in case you or your spouse dies during a time when you still have kids or other dependents at home. It can help to replace income when a working parent passes away unexpectedly. And, for a stay-at-home parent, the death benefit can help cover the cost of childcare, cooking and cleaning costs if the parent who normally handles these tasks passes away. Think about the value of your income, debts and other relevant expenses when figuring out how much life insurance you may need for each member of your family.
You may be in the process of deciding what policy type is right for you. The following policy types are popular options for parents.
- Term life insurance: Term life insurance is typically much cheaper than whole life insurance, as a payout is not necessarily guaranteed for the life of the policy. As a result, term policies may be a great option for families on a budget who only want life insurance coverage for a specific number of years, such as when their children are young and financial support is likely most critical.
- Whole life insurance: Whole life insurance is typically much more expensive than term life, as it remains in effect for your entire lifetime and a payout is considered inevitable. It also comes with a cash value account that can gain interest and/or returns, depending on the type of permanent or whole life insurance policy you have. You may be able to borrow against or withdraw funds from this account over the course of your life. Depending on your goals, whole life insurance may be a great option for some families.
- Joint life insurance: Joint life insurance is commonly shared by married couples, but can also cover two unmarried people. These policies may cost less than two individual policies, depending on each partner’s health conditions, and will either pay out when the first person dies or once both have passed away. Leaving an inheritance to your children in this way may be beneficial from a tax standpoint, since death benefits are usually free from income tax when they are paid out to the beneficiaries
First-to-die joint life insurance policies pay out the death benefit when the first spouse dies. This type of policy may be cheaper than purchasing two separate policies. The other option is a second-to-die policy, which pays out the benefit after both spouses pass away..
Joint life insurance policies
As a less-commonly discussed type of life insurance, you may be wondering how joint life insurance policies work. Joint life insurance is typically considered a type of permanent life insurance, which is effective for as long as you pay the premiums. It covers two people and can be structured to build cash value and yield a tax-free death benefit. However, you may also be able to purchase joint life insurance policies that expire after 20 or 30 years, similar to term life insurance.
Joint life insurance policies are not as common as individual insurance policies, but may be right for couples who both expect to have some form of life insurance in place. In some cases, buying a joint policy can be cheaper than if two individuals have separate policies. The two different types of joint life insurance include first-to-die life insurance, where the benefit is paid when the first of the two spouses dies, and second-to-die life insurance, where the benefit is paid when both spouses die. If you’re not sure which type of joint life insurance policy would be right for you, it may be beneficial to review a life insurance guide or talk with a licensed life insurance agent.
It can often be cheaper due to less underwriting labor.
It can be helpful with estate planning by relieving some of the issues caused by probate (the process of validating and executing on a will).
If one person has health issues, a joint policy may increase the other person’s life insurance costs.
Joint life policyholders may need to wait a longer time before the death benefit can be paid out.
If policyholders are married, a divorce could complicate the process of splitting the joint insurance.
Buying life insurance policies for children
Most families may not instinctively consider getting life insurance for their children. After all, children typically don’t contribute financially to the household and they are generally at a lower risk of death than older individuals. However, there are a few reasons life insurance for children could be helpful. The first reason would be to account for an untimely passing, in which case you could take out a small policy to cover final expenses.
Another reason is to lock in an affordable whole life premium at a young age before any pre-existing conditions appear. Developing health conditions could make it expensive for a child to get their own insurance later in life as a young or older adult. Instead, you could get a policy early and transfer the policy to your child when they turn of age, typically 21 years old.
Can you buy life insurance for your parents?
While there are strict rules about who you can take out a life insurance policy on, you can purchase life insurance for your parents to help cover any expenses they may leave behind. Buying family life insurance for your parents can help them (and you) financially in a number of ways. For example, a death benefit can help the surviving parent if they largely rely on the other for retirement income or other benefits.
An accelerated death benefit rider could allow them to tap into policy funds to pay for long-term care. Alternatively, if you’re named the beneficiary for a standard life insurance policy, you would receive the benefit when the policyholder passes away. This might help replace any income you’ve lost or expenses you’ve incurred if you act as a caregiver in their final years.