Parents worry about many things when a new baby arrives. For those getting used to the cost of diapers and childcare, worrying about the soaring cost of college seems like a far-off concern. However, the best way to protect your child’s future options starts with life insurance.
Parents who want to secure their children’s future should put their money in life insurance. Some types of policies can help you to pay for your children’s education even if you are still alive. All types of life insurance can help ensure that your children will have the amount of money you specify to assist them if something happens to you.
Purchasing life insurance scares some people, because it can involve accepting your mortality. But, things do happen, and you undoubtedly do not want unpredictable events to derail your family’s future. Life is uncertain, and life insurance helps manage life’s risks.
Reasons Parents Should Invest In Life Insurance
Life insurance provides financial resources to people who depend on you for support. You need to be concerned about replacing your income or services (a stay-at-home parent’s roles in providing care should also be considered), where they will live, and funds for their upbringing and education.
Young children have years of fiscal dependence ahead of them and, odds are, you do not have savings to adequately support them if something did happen to you. Besides your children, life insurance could also benefit a spouse or partner who would struggle without you, a business partner, or dependent parents and siblings.
How Insurance Helps In Funding Your Child’s Education
All life insurance policies pay a death benefit (i.e., money) to the beneficiary or beneficiaries when the insured person passes. The insurance payout should support your family in your absence, alleviate financial pressures, pay off the mortgage, and fund your child’s college education, as well as other long-term goals. Accordingly, the amount of insurance purchased should factor in what you could reasonably expect schooling to cost.
Some life insurance policies include a cash value, which grows over time. This cash value can be accessed for a child’s education, even if the insured is still alive. One advantage to using life insurance accumulations for college costs are that those assets, unlike a 529 college-savings plan, are not used by a huge portion of schools when determining financial aid eligibility.
Policyholders can take a “loan” from their cash value balance tax-free to cover tuition expenses. Money pulled out as a straight withdrawal is taxable. The outstanding loan amount is deducted from the death benefit.
What about saving for college in a 529 or other savings plan? It takes a long time to build up a sizeable balance to cover four years of college. If something happens to the parent putting aside regular savings amounts before that time, there will be a significant shortfall when the child is ready for college. Life insurance is a “self-completing” plan. The full amount of the policy value is there from the outset.
What if a child does not go to college? Money in a 529 plan is subject to taxes if not used for education. The cash value in a life insurance policy can be used, without a penalty, for other purposes, such as additional retirement funds.
How To Choose The Right Life Insurance And How It Is Priced
Deciding on the right type of life insurance for parents is driven by whether or not there is a savings component on the policy and the premium amount.
There are two primary types of life insurance: term and permanent.
- Term insurance, as implied, is for a set period of time, such as 20 years, and then it expires. This can be an issue if there is still a need for life insurance later on, such as a new mortgage or younger child to school. Term policies have a set benefit amount paid in the event of your death during that term, and no cash value savings. One advantage to term insurance is its lower cost, provided you buy it young. Purchasing another term later can be very expensive.
- Permanent life insurance can remain in force for an entire lifetime. There are many types of these policies, but whole life and universal life are the most common. These policies build cash value as part of each premium payment. There are investment options on some policies that mirror stock indexes and other market behavior to boost further the savings accumulated. Permanent life insurance is also advantageous if you have a lifelong financial dependent to provide for, such as a special needs child or sibling. The investment characteristic in permanent life insurance policies does result in higher premiums than a similar term policy with the same face value. After all, permanent life insurance covers your whole life, and the premiums include money going toward savings. So, if something did happen to you before your children finish school, the death benefit would cover their costs, or you can access funds saved later on to help pay for school and attend the graduation.
Other things affect the cost of life insurance beyond the type of policy chosen. Insurance companies work with statistics and the frequency of health issues to set their premium rates. Accordingly, life insurance premiums are based largely on the insured’s age. So, younger applicants who purchase a policy will pay a lower premium than someone purchasing the same amount of coverage in their 50s or older because of relative life expectancy.
Additionally, women generally pay lower premiums than men because they live longer. Other things that affect life insurance quotes are family medical history, marital status and lifestyle. Lifestyle choices can impact costs and getting coverage significantly. It makes sense for smokers to pay more than nonsmokers because they have a greater risk of developing cancer or other health issues.
However, further lifestyle factors considered include a DUI or driving record issues, participating in potentially dangerous hobbies like skydiving or mountain climbing, and the nature of occupation. All of these obviously increase the likelihood of someone dying younger than would otherwise be expected.
Ways To Leave Your Life Insurance To Your Children, Hassle-Free
One of the toughest things for parents to deal with when talking about life insurance or estate planning is who will take care of the children and their assets. In a two-parent household, the other parent is usually the beneficiary.
But, what about single parents or, as a contingency, both parents dying together? People who purchase life insurance for the benefit of children need to establish a legal means for the proceeds to be managed until the children are adults.
Otherwise, the life insurance company cannot disburse the death benefit until the court appoints a guardian. That process involves attorneys, court proceedings and costs – as well as hassles – that will not benefit the children.
Options parents should consider include:
- Naming an adult as a beneficiary who can take care of your children and the assets on your behalf. This involves naming a trusted adult who will receive and use the money for the children’s benefit. If you are confident that this adult will not waver from his or her duty, even years down the line, this might be the easiest option.
- Name the children as beneficiaries, but also name a custodian under the Uniform Transfers to Minors Act (UTMA): The UTMA allows minors to receive life insurance proceeds, patents, property, royalties, art and other gifts. Under the UTMA, a custodian manages the minor’s account until they come of legal age, which varies between 18 and 25, depending on the state. If you want the proceeds to go to more than one child, the donor or insured needs to specify the percentage each should receive. The Act allows the donor, or in the case of life insurance, the insured, to name someone as a custodian who will have the fiduciary responsibility to manage and invest the property on behalf of the minor. The property belongs to the minor from the time the property is gifted. Proceeds are taxed at the child’s individual tax rate. A life insurance agent can help you set up a UTMA account and name a custodian when you purchase a policy. Most insurance companies have forms for it.
- Setting up a living trust and naming the trustee as the beneficiary. A trust affords more flexibility than a UTMA. For instance, you could have the trust pay for a child’s upkeep and college education, but limit distribution of the remaining money to specified terms, such as on the child’s 30th birthday. This helps avoid a young adult getting a windfall and blowing it quickly. If you have established a trust, the trustee should be named as the beneficiary of the life insurance policy. Then, in the trust document, you should name the minor children as beneficiaries of insurance proceeds the trust receives.
Complicated But Important Decision
Deciding on the type of insurance, face amount and beneficiaries is an important decision for any parent. After all, raising children gives parents enough to worry about. So, you want to work with someone that specializes in life insurance and has lots of experience helping families plan their financial future.
Factum Financial provides advice and educates people on the best uses of life insurance products to protect their loved ones. The company works with clients before, during, and after the purchase of life insurance to ensure their needs are being met as their lives change.
Reach out to Factum Financial today to learn more about how life insurance can make college a reality and offer financial protection for your children.
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