Life Insurance For Parents-The Complete Guide
Life Insurance for parents
You don't need to be a rocket scientist to know that you need life insurance as a parent.
When you see that little human being arrive in the world something happens inside, and you realize that your life is not just about just you anymore.
You and your partner have created this new little being, and now you have to own up to the responsibility that you've been thrust into.
So you can't go out partying all the time like you use to.
Having been a father for the last 25 years and also being in the insurance world, I've seen it all when it comes to kids and finances.
In my life insurance practice, I deal with consumers of all ages, especially new parents.
I've identified five essential steps that parents should take to make sure that they protect their family with as much life insurance as the family needs as cheaply and quickly as possible.
Step one-figure out precisely how much life insurance you need
Don't let Dave Ramsey or Susie Orman or the FIRE movement dictate the terms of your financial protection.
You heard me right. In my opinion, these financial populists have done more damage in the field of life insurance planning than they know.
Yes I know, it's heresy to speak this way.
The problem I have with financial evangelists is that they use rules of thumb that certainly don't address every situation, and they leave no room for discussing a family's desires concerning financial planning and life insurance planning.
What I mean is this... Suppose you're listening to the AM radio station, and you hear Dave Ramsey on a rant talking about how term life insurance is the only thing that you should possibly consider and that you really only need five X your salary in life insurance benefits to take care of your family.
Well, that might work for some people who have a relatively low standard of living, but for many people, that formula just doesn't work.
Actually, it's not a formula, it's a rule of thumb based on some hypothetical situation that most often doesn't exist.
why force your Family into a Minimalist lifestyle?
In my practice, I counsel my clients to write down all of the things that they quote wish unquote they could have well both parents are still alive.
That might be a new house, a new car, and education fund for your child or children, a second home, and education fund for one of the parents who might want to go back to school to earn a graduate degree, etc.
Then, the next part of the exercise is to pretend that one of the parents is not here anymore.
What would the family want to do if mom or dad was not here?
Would dad want mom and the children to stay in the apartment they're living in?
Or would dad want mom and the children to be able to move into a permanent home like they were planning on before dad met his demise?
i can't stand life insurance rules of thumb!
I daresay that five times salary for dad's life insurance would definitely not be enough to fulfill this dream, especially if you hadn't saved up enough money for down payments and furniture and other moving costs.
The same goes for an education fund which could be created instantly at dad's death, thereby taking the pressure off mom and the kids.
Will you pay for public university, or private college?
Where did you go to college?
Didn't attend college yourself, but you want Junior to be the first in the family?
The next part of the exercise I take clients through is talking about the desire to continue working.
If dad meets an early demise, does mom want to go back to work and leave the kids with a nanny or in daycare or preschool?
Do mom and dad want there to be enough money available at dad's death to enable mom and the kids to remain in their home and allow mom to have the choice, key word "choice", to go back to work part-time perhaps?
This issue is probably the most overlooked part of life insurance planning encounter routinely in my practice.
Families fail to realize how inexpensive it is to provide adequate funding to allow dreams and hopes to continue without one of the parents.
The death of a parent does not mean the end of hopes and dreams, although often time's that's what happens.
Step two-ask yourselves how long you want life insurance
Okay, so now you've answered the question about how much life insurance you possibly could need.
You realize now that a rule of thumb typically does not answer that question adequately.
What you do now?
Once you've answered the first question above and taken that first step to figure out how much life insurance for parents you need, then you need to find figure out how long you want to own a life insurance policy. And guess what?
Dump the off-the-shelf formulas when buying life insurance for parents!
We have more rules of thumb! Again this is where I have a problem with folks like Susie Orman and Dave Ramsey and websites like NerdWallet and Policygenius and many of the other technology firms who are getting into the life insurance business.
These "advisers" and entities typically don't have enough real-life experience to ask the what if questions.
If you ask Dave and Susie will say something like "well you only need life insurance as long as the kids are in college".
Anything beyond funding for little Junior or little sister through college is a waste of money.
You should "self-insure".
find out how much life insurance to buy
Use our easy calculator to plug in your specific numbers so you can run exact term insurance quotes below. It's fun and EASY!! We have a more in-depth page on the various types of life insurance here.
Life insurance for parents-should parents self insure?
Technically the term self-insured means that you are willing to absorb a known risk if you will incur damages from that risk.
If you had a choice between eating a $1 million expense or a $1500 per year cost which would you rather incur?
Obviously, you'd say $1500 per year.
Most people can afford $1500 per year to provide $1 million at some point in time.
That's the theory of insurance, spreading a known risk among many different individuals to soften the financial blow.
I'm oversimplifying but bear with me.
So, let's say that you've agreed to pay $1500 per year to protect yourself against the million dollar risk for the next 20 years.
Let's also assume that you've been excellent about saving money in your 401(k) plan at work or your other retirement plans and that you've built up an emergency fund and done everything possible that you could think of to protect yourself.
So the end of 20 years rolls along, and you've got a sophomore in college, a senior in college, and a junior in high school.
You realize maybe I needed life insurance for longer than 20 years.
Now you're 20 years older than when you started this term life insurance policy, but you decide you want to keep the insurance in place.
You need to get a new policy and start the clock over again for another 20 years.
However, this time instead of $1500 per year for the same benefit it's now $10,000 per year, and instead of a 20-year period of insurance, you can only now afford 10 years.
And that's okay, it's still not a great deal, but it works.
parents can get sick while owning life insurance
Then throw another wrench into the scenario and assume that you've developed sleep apnea along the way and high blood pressure, and high cholesterol, and type II diabetes, and you've gained 60 pounds.
Given that scenario, you may not even be able to buy insurance at all at any rate.
You should have had a longer term policy to take you through that extra period.
Dave Ramsey won't tell you that.
He'll say to you only need 10 or 15 years of insurance may be 20 years, but he won't say oh you should probably get 30 years of coverage or 40 years of protection.
Because taking a conservative financial approach doesn't sell anything.
That doesn't create a controversy.
It's not confrontational advice that's just good boring conservative advice.
Okay, I'll get off my soapbox now and take you to step three.
Step 3-What kind of life insurance should parents get?
Now that you've come this far and answered questions or steps one and two, the next step is to figure out what type of insurance you need to get based on the answers to those two questions.
If in your heart of hearts you honestly only want 10, 15, 20, years of life insurance then the answer is you definitely need term life insurance.
If however you went through the steps above and you decided that maybe, just maybe, you want life insurance or at least some life insurance for a very long period until you die, which could be either tomorrow or 60 years from now, then you should probably consider some form of permanent life insurance.
term life insurance is best for parents
The vast majority of consumers in the United States would be much better off with term life insurance than permanent life insurance.
There I said it! I agree with Suze Orman and Dave Ramsey on this point.
However, if you do want to provide for your family beyond the 20-year time-frame, then you really should consider the form of permanent insurance called universal life insurance.
That policy offers flexible premiums and the ability to stop and start payments depending on how interest rates have performed.
One thing I always stress is that most families should start out with term insurance and by the exact amount of life insurance that they need before they enter into a permanent insurance policy.
Most good modern term life insurance policies offer the ability to switch into a permanent life insurance plan parentheses called the conversion option) without proof of good health to the insurance company.
Always always always start out with term insurance. It's the biggest bang for the buck. It's straight pure death benefit with no bells and whistles no cash value, no investment accounts, no crazy illustrations at all. If you use it, you lose it.
Find an independent life insurance broker who can help guide you
step 4-where to buy your life insurance
Okay, so you stake taken steps one through three.
Now where you go to get the insurance that you've decided that you need and want to buy?
You could go to your friend and neighbor who might be with State Farm or farmers or Northwestern Mutual or New York Life or Guardian, for example, they'll probably be just fine, but they won't be independent.
That's because they have the name of the insurance company on their business card and they represent the insurance company first in the consumer or client second.
Most life insurance professionals start out with one of those large companies, and then they realize that there's a whole different world where you can help consumers without primary allegiance to an insurance company in you can be completely independent.
always buy life insurance for parents through an independent broker
If you had to choose, I'd go with one of those websites over one of the named insurance companies.
That's because you'll have tons of choices. On our site, for example, you'll be able to run through a life insurance calculator and get quotes where you'll find at least 30 different options for the type of insurance you're looking for.
And that's the same with the other websites as well.
Go ahead and read Dave Ramsey and Suze Orman and get all the information you can possibly get. But at the end of the day when it comes time to purchase the life insurance, you'll be far better off going to an independent broker.
life insurance Brokers represent consumers first and insurance companies second
Most modern life insurance websites will also let you apply online in a completely paperless environment. The online brokers are not going to ask you for a face-to-face appointment.
The reason that agents with the other insurance companies like Northwestern Mutual and others want a face-to-face meeting is because they want to try to sell you permanent insurance first.
Those carriers offer great whole life policies.
They pay attractive dividends and have been in business since the mid-1800's.
That's great, but you don't need that right now.
You need maximum protection in the form of term life insurance.
Especially if your new parents just starting out and you haven't figured out your budget yet, the last thing you need is for an insurance agent to come to your house and try to sell you a policy that you probably don't need.
Even if you want permanent insurance, I would definitely make sure that you get other competing quotes from several different insurance companies.
Agents with the other companies are called quote captive unquote because they owe the first shot at selling a policy to their primary company.
They have first right of refusal.
State Farm and Allstate and farmers or even worse, they can't go outside of their systems.
They are entirely captive, and it is a closed system.
I get referrals from several State Farm agents locally because they can't help clients who have medical problems or need specific types of insurance that State Farm doesn't offer.
They're okay for homeowners insurance and auto insurance parentheses I'm not really convinced of that myself because their limits are pretty low, but that's where they excel).
Obviously, you can tell I'm biased.
The problem is I've seen all too often where applicants are convinced to purchase it whole life policy where they've backed into the premium, and it might be a $100,000 whole life insurance policy, but the applicant needs $1 million of protection.
That is unethical in my opinion and grounds for malpractice.
Step five-now what?
The last step in my guide for parents and life insurance is to shop around. Get as much information as you possibly can.
Millennials are proven to research a purchase at least seven times before making a buying decision previous generations, especially in the life insurance field.
This research comes from LIMRA, a life insurance research think tank.
In fact, LIMRA estimates that consumers overestimate the cost of life insurance by 78%.
So, after you read this guide and do your homework make sure you get some term insurance quotes if you haven't already done so.
You'll see just how affordable it is to protect your family with high-quality term life insurance.
You do not have to compromise on your desires and dreams for your family when you're buying life insurance protection.
Life insurance is now more affordable than it's ever been.
So, please don't wait until it's too late to get a solid protection plan in place for your family especially you new parents out there.