Life insurance for single parents

Life insurance is one of those things that people don’t like to think about. However morbid it may seem, it’s even more important for single parents to consider life insurance than it is for a family with two parents. It can be a lifeline that your family may need if they suddenly find themselves without your support.

When a person dies, the life insurance policy pays out to the designated beneficiary. This could be the remaining parent or a guardian who will become responsible for the children. Often, a small monthly premium can provide a large payout. The life insurance benefit payment can then be used for any number of costs, including to cover the basic necessities of food, shelter and clothing or to replace the income and pay off any debt left behind by the deceased parent.

For single parents, it is important to weigh the cost of life insurance coverage against the benefits the policy can provide. There are several types of life insurance that may be good options for single parents. Term life insurance and permanent life insurance both offer perks that could make them appealing choices.

Term life insurance

Term life insurance is a form of life insurance that lasts for a set period of time, usually 10 to 30 years.

“I’m a big fan of term life insurance for single parents because it is relatively inexpensive,” says Michael Shea, a certified financial planner and advisor for Applied Capital. “If you’re young and healthy, you should have no problem getting a term policy to keep you insured until your kids are adults and not financially dependent on you.”

Because term life insurance is temporary, it tends to be more affordable than a permanent life policy. However, term policies expire. You can typically renew them, but you might pay a higher premium based on your new age.

There are several different kinds of term life insurance policies. Here’s what you should know about each:

• Level term life insurance: Level term life insurance maintains the same death benefit amount throughout the term of the policy.
• Decreasing term life insurance: Decreasing term life insurance may be a good option if you are committed to paying down your debt over time. While the death benefit will decrease and provide less coverage as the years go by, your children will likely need less support when they reach adulthood. These policies are among the best life insurance options for single parents, as they are cheaper than level term policies.
• Guaranteed renewable term insurance: This type of term life insurance policy still has an expiration date, but there is also the option of automatic renewal.
• Group life insurance: Group life policies are typically part of an employee benefits package. The price is usually very reasonable and you may be able to skip a medical exam, but there could be few (if any) customization options.
• Final expense insurance. As its name implies, this type of policy helps pay for final expenses, such as the cost of a funeral and burial. Policies are typically cheap, but the death benefit won’t be very large.

Although term life insurance may be a good option, there is another type of life insurance that you may want to consider: permanent life insurance.

Permanent life insurance

Permanent life insurance policies remain in effect for as long as you are alive, assuming you continue to pay the necessary premium. Permanent policies may build up cash value over time, which can be borrowed against or withdrawn in certain circumstances. However, because it lasts for your whole life, permanent life insurance is typically more expensive than term life insurance.

There are two main types of permanent life insurance, although each type also has subtypes:

• Whole life insurance: Whole life insurance is a relatively simple type of life insurance. The policy lasts a lifetime so long as you continue to pay the premiums. Whole life policies typically earn cash value at a set interest rate.
• Universal life insurance: Universal life insurance provides a level of flexibility when it comes to your life insurance. You may have the option to adjust your death benefit or premium amount. Universal life also accumulates cash value, although the interest rate may vary depending on the market.

“For single parents, an overfunded fixed index universal life insurance policy might be a good idea,” suggests Mark Charnet, founder & CEO of American Prosperity Group. “These policies are available from many top-rated insurance companies and are savings options that have the potential to earn a rate of return on par with the stock market without risk of principal loss and can grow tax-deferred while providing the parent with a tax-free income in retirement. This policy can also be used for a child’s education and will not count against their request for financial aid eligibility. This program works best when college expenses are at least 12 to 15 years down the road, but can still perform well in a less desirable scenario.”

Sam Price, owner and broker at Assurance Financial Solutions, adds the following about choosing between permanent and term life insurance: “For single-parent households, permanent life insurance can be a great tool so long as there is sufficient income to make it worthwhile. If parents are on a budget and are struggling to make ends meet, term life insurance is always going to be more suitable. But if income isn’t a question, then permanent life insurance can be a great addition to the financial plan.”

Before you decide which type of life insurance policy to buy, you may want to consider your financial goals and how you want your life insurance to function. Talking to a licensed insurance agent or a financial planner may be helpful.

Choosing the right amount of life insurance can be difficult. You want to purchase enough to provide for your children until they become financially independent, but knowing exactly how much it will cost to care for them over the next five, 10, 15 or more years is tricky. Buy too little, and their guardian may struggle to afford necessities, but buying too much means paying larger premiums than necessary.

One of the first things to consider is your debt. Your children won’t inherit your debts unless they’re adults who co-signed on it. However, your creditors can seize your property for unpaid balances. If you want to pass assets like your home to your children, you’ll need enough insurance to pay off outstanding debts. 

Then, think about future expenses your children might incur. This includes everyday things like groceries and shelter, as well as possible education expenses, such as college tuition. To come up with a number, you could estimate how much you spend on each child per year and multiply that by the number of years until they reach an age where they can fend for themselves. Add that to the amount it would take to pay off your debts and any other major expenses you wish to cover (like college). 

Alternatively, you might want to review your situation with a life insurance agent before making a choice. At that point, you can start thinking about who to name as the beneficiary.

When you purchase a life insurance policy, you will choose a beneficiary who will receive the policy payout if you pass away. There are several options for beneficiaries. You could leave the money to:

• Your children: Appointing your children as beneficiaries may seem like the obvious choice, but it could be risky. Life insurance companies are generally unable to make payments to minors. In this case, you would appoint a legal custodian, perhaps one of your children’s grandparents, to be responsible for the death benefit until your children are of legal age.
• A caretaker: If your children are young, you may want to leave the money to their appointed caretaker. You might want to discuss this option with your insurance company and with the person you intend to leave the money to, to make sure everyone involved understands the agreement.
• A trust: An attorney can help you establish a trust for your children. In this case, the trust would be the beneficiary of your policy and it would be responsible for controlling your money in the ways that you specify.

Life insurance agents and financial planners may be able to help you choose a beneficiary for your life insurance policy.

Frequently asked questions