When buying life insurance for your family, there’s no one-size-fits-all solution. A policy that’s perfect for you may not be right for your spouse, child, parent or grandparent.
Life insurance for your family can help cover a range of costs, such as funeral expenses, college debts, lost income or child care. Understanding your options can help you create the best family life insurance plan for your loved ones.
Who needs family life insurance?
Life insurance may not be necessary for everyone in your family, but coverage is important for anyone whose death would place a financial burden on others.
You can determine who needs life insurance by looking at the roles your family members play and their long-term financial responsibilities.
- Breadwinner: Life insurance can replace lost income if a primary earner dies.
- Non-earning spouse: Life insurance can help pay for services a spouse currently provides for free, such as cleaning and child care. These services can be expensive to replace: The average cost of preschool child care in America is more than $9,000 per year, according to U.S. Census Bureau data from 2011, the most recent year available.
- Child: Children typically don’t need life insurance, because no one relies on them financially. However, there are policies available should you want coverage.
- Parent or grandparent: Older family members may not need life insurance if no one depends on their income, but a policy can cover funeral expenses or debt, such as mortgage payments on a home you want to keep in the family.
To help plan your family’s coverage, think about your long-term goals. For example, if you need life insurance as a new parent, perhaps your most important goal is to protect your income. If so, consider increasing your own coverage instead of purchasing a family life insurance policy for your child.
Family life insurance for you and your spouse
The best option for most couples is to buy separate life insurance policies for each spouse. There are two types of coverage available: term and permanent life insurance.
Term life insurance is typically sufficient for most families. You can set the length of a term life insurance policy to cover you until your kids are grown, your mortgage is paid off or your family no longer relies on your income.
Permanent life insurance policies, such as whole life insurance, offer lifelong coverage and build cash value. However, these policies are generally more expensive than term life insurance.
Buying a joint policy
In some cases it may make sense to buy a joint life insurance policy — often called second-to-die or survivorship life insurance — that covers both you and your spouse. In general, joint life insurance policies for married couples are a type of permanent life insurance that pays out after both policyholders die.
WHO IS SURVIVORSHIP LIFE INSURANCE FOR?
The main purpose of survivorship life insurance is to help cover major costs, such as estate taxes or the care of a special-needs child, after both parties die. If only one spouse dies, the surviving spouse doesn’t receive a death benefit and is responsible for 100% of the premiums moving forward. Therefore, these policies are suitable only for couples who are financially independent and can cover living costs without the help of a payout.
POINTS TO CONSIDER
As with marriage, joint policies are a long-term commitment. Splitting a policy during a divorce can be complex, and you must be certain you can support yourself if your spouse dies before you.
Another factor to consider is cost. Premiums depend on the age and medical histories of both you and your spouse. The severe medical conditions of one spouse can drive up the cost of the entire policy. As a result, you might be better off buying two separate policies and tailoring them to fit your individual needs.
On the flip side, if you’re both healthy, sharing a policy might work in your favor. Insurers don’t have to pay out survivorship benefits until both parties die, which means they spend more years collecting premiums. This translates to lower risk for the insurer and lower rates for you.
WHAT IS FIRST-TO-DIE LIFE INSURANCE?
First-to-die life insurance is a rare type of joint life insurance that pays out after the first policyholder dies. Few insurers — if any — offer these policies because most people don’t buy them. Here’s why: First-to-die life insurance is only slightly cheaper than buying two separate policies. And it pays out after the first spouse dies, leaving the surviving spouse with no coverage. In most cases, it makes more sense to cover each person separately and get a payout regardless of who dies first.
Family life insurance for your child
You don’t typically need life insurance for your children. If you want to cover unexpected costs or save for your child’s future, you’re generally better off investing your money or opening a savings account.
However, policies designed for children are available if you want coverage. Children between 14 days and 18 or 25 years old are typically eligible.
Permanent life insurance for children
In general, child life insurance policies are a form of whole life insurance, which means coverage is valid for the child’s life, as long as the premiums are paid. Policies typically include a cash value component, which you can borrow against or withdraw if the policy is canceled. However, building cash value is a perk and shouldn’t be the only reason you buy a policy.
Rates for child life insurance are typically fixed and don’t increase over time. Some insurers allow you to pay off the policy after 10 or 20 years, leaving the death benefit intact for the child’s lifetime.
In some cases you can lock in the option to add more coverage in the future, regardless of the child’s health later in life. However, additional coverage amounts are often limited. In general, you can increase coverage only at predetermined ages, yearly intervals or approved events, such as when the child marries or becomes a parent.
Your child’s loans might seem like something you’d want to cover, but unless you co-signed or guaranteed the loan, you aren’t responsible for your child’s debts. If you did co-sign, there are life insurance products that specifically cover outstanding loans. Term life insurance for college students typically covers the exact amount of the loan and ends once the debt is paid.
Family life insurance for your parents or grandparents
You may not need to buy coverage for older members of your family, especially if no one relies on them financially. However, policies are available for those who want to provide an inheritance or cover specific costs such as funeral expenses or estate fees.
Elderly family members may find it tough to qualify for life insurance due to their age or health. As a result, coverage can be expensive.
There are four main types of life insurance for seniors:
Term life insurance covers the policyholder for a set number of years and then expires. There’s no payout if the insured person outlives the term.
Whole life insurance is a type of permanent life insurance that builds cash value. It guarantees a payout when the policyholder dies, so it costs more than term coverage.
Guaranteed universal life insurance is a combination of term and permanent life insurance. These policies offer lifelong coverage but typically build minimal cash value. Although they’re often cheaper than whole life policies, you can lose coverage if you miss a payment.
Guaranteed issue life insurance is a type of permanent life insurance that guarantees coverage regardless of your age or health. In general, applicants must be between 40 and 85 to apply. While the guarantee might sound appealing, guaranteed issue life insurance can be expensive for the low coverage it offers.
Family life insurance solutions through work
If you get coverage through work, you may be able to add supplemental life insurance for a spouse or child. But review your current plan before purchasing more coverage, as your basic policy may already cover your spouse or child for free.
There are pros and cons to getting group life insurance through work. Rates are rarely locked in, which means your premiums can increase as you age. There are limits to how much coverage you can buy for yourself, a child or spouse, and costs vary among employers. Shop around: You might be able to get more coverage for less on the open market.
Certain rules may also restrict your options. For example, you may need to purchase supplemental coverage for yourself before buying additional life insurance for your spouse or child. Coverage through work is not always guaranteed, which means you may need to complete a medical exam or prove you’re not a risk to insure before qualifying for additional coverage.
Before buying any supplemental life insurance through work, or relying solely on your free policy to cover your family, check if you can take your coverage with you. Policies through work are typically tied to your employment. In short, if you leave your job you might lose coverage.
Family life insurance riders
If you want the convenience of a single policy but need extra coverage for your spouse or child, consider adding riders to your base term or permanent life insurance policy.
Life insurance riders expand the coverage of your base policy by covering a specific person or need. You can buy riders on the open market or through your employer if your company allows. You might have to add riders when you first buy the policy, or pass a medical exam to add a rider later.
Life insurance riders are not always worth it. Depending on the coverage you want, it might be safer to buy separate policies instead of riders. Riders are typically canceled if the policyholder dies, potentially leaving family members with no insurance.
SPOUSE TERM RIDER
Spouse term riders are valid for a set number of years but can’t last longer than the base term policy to which they’re attached. You may be able to convert your spouse rider to a whole life insurance policy at a later date.
Child riders cover a set period of time and pay out if the child dies during that period. These riders typically cover children from 15 days old to 18 or even 25 years old. At that point, the child may have the option to convert the rider to an individual life insurance policy. Age restrictions for parents vary. For example, you may need to be older than 18 and younger than 55 to add a child rider to your policy.
In general, an “other insured” rider can cover anyone you have an insurable interest in — which means you would suffer financially if the person dies. In theory, this could be a parent or grandparent. However, premiums and coverage amounts are typically based on the applicant’s age, gender and health, which might restrict access for elderly family members.
Not all insurers offer the same riders, and availability can differ among states.
Source: NerdWallet / Featured image by