Life insurance for single parents

Why single parents need life insurance

Though the thought of losing a parent is heartbreaking, it is a reality that many single parent families face. As such, securing a life insurance policy for yourself can be one of the best protections you give your child. Life insurance can help to safeguard your children’s financial future if you are no longer able to provide them with support.

When a person dies, the life insurance policy pays out to the designated beneficiary. In the case of a single parent, the beneficiary is typically the remaining parent or guardian who is responsible for the children. 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. Often, a small monthly premium can provide a large payout that can help a single parent ensure that their children will have the financial support they need from the policy.

Brendan O’Brien, a financial planner and life insurance expert with Prudential Advisors, offers an explanation. “Single parents need life insurance to provide for the future expenses of their children if they should pass away. This includes the basic necessities of food, shelter and clothing,” he explains. “Life insurance is meant to replace income and neutralize any debt left by the deceased parent before their child can attain an age of financial independence.”

Life insurance can be a lifeline that your family may need if they suddenly find themselves without your support.

Types of life insurance for single parents

There are several types of life insurance that may be good options for single parents. Term life insurance and permanent life insurance both offer qualities 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 do expire. You can typically renew term life policies, but you will pay a new premium based on your new age. This means your payments will likely increase with age when you renew the policy.

There are several different kinds of term life insurance policies. A few of them are:

• 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 when you expect your debt to decrease over time, as the death benefit decreases and provides you with less coverage as the years go by.
• 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.

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 the whole of your 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 for your entire life, as 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 children’s education and will not count against their request for financial aid eligibility. This program works best when college expenses are at least 12-15 years down the road, but can still perform well in a less desirable scenario.”

Sam Price, owner of and broker at Assurance Financial Solutions, discusses how to choose between permanent and term life insurance. “For the single-parent households, permanent life insurance can be a great tool so long as there is sufficient income to make it worthwhile,” he explains. “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 a death benefit amount

When you are deciding how much life insurance you need, you may first want to decide how long you want to provide your family with a replacement for your income. You may also want to consider how much debt you have, including your mortgage. Any long-term expenses, such as college tuition, could also factor into your decision. Finally, you could take into account funeral expenses and any financial gifts you want to leave for your loved ones or to charities.

O’Brien offers a real-life illustration, using a parent with an annual income of $100,000 and a home mortgage of $300,000. O’Brien speculates, “Based on income and debt, a $500,000 term policy would pay off the mortgage and provide for $200,000 for the child’s expenses in the care of another. A 20-year term policy would be sufficient to insure the parent through the child passing into adulthood.”

O’Brien also poses an alternate scenario, musing, “If the child were older at the time of death, for example, age 16, the mortgage would be lower, maybe $50,000, but now higher education needs would be more pressing. The child would have access to $450,000 to pay for education and help with living expenses in the absence of their primary caregiver.”

Since the death benefit of a life insurance policy is what provides the financial protection if you pass away, you might want to review your situation with a life insurance agent before making a choice.

Deciding on beneficiaries

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.