I am a bit unshakeable about a few things. One of them is that a parent has a moral and ethical obligation to her children to carry enough life insurance to protect that child in the event the parent dies while the child is under 18.
Life insurance works wonders for families that have fallen victim to disaster and does so at little cost. However, like most things financial, life insurance is shrouded in mystery which helps add to confusion. When the human mind is confused it functions poorly, and its usual reaction is to shut down and do nothing.
Life insurance is a relatively straight-forward concept: a person enters into a contract (the ‘policy’) with a company in which the person (the ‘policyholder’) pays $X each year to the insurance company (the ‘premium’) for some period of time (usually 10 to 25 years). If the person is still alive at the end of the contract, the contract terminates and no further money is owed. However, if the person dies during that period the company pays a fixed amount of money (the ‘death benefit’) to whomever the policy holder indicated she wanted to receive it.
Like most insurance policies you buy it hoping you never need it.
How much the premiums are is a function of the size of the death benefit as well as the insurance company’s belief in how likely you are to die during the term of the contract. Another factor is how many television commercials the insurance company purchases during football games. Like any other business, the company’s overhead costs factor into the price of the product. Companies with fewer commercials have lower overhead costs and should give you a better price on a policy.
Younger, healthier people pay less while older, sicker people pay more. Life insurance companies have been around for decades, and overall have an excellent idea about how many 36-year-old non-smokers are going to die in a given year. They just don’t know which ones.
Thankfully they don’t really care, because they charge enough in premiums that the company will still make a profit after all the death benefits owed are paid out to beneficiaries. Also, because life insurance is well understood by industry, there are many competitors in the market seeking to win your business, and the product is competitively priced.
This brings me back to the issue of children and parents. Since new parents are young enough and healthy enough to reproduce, the odds are strong that a life insurance policy won’t cost that much money at all. If we put the annual cost of owning life insurance (and for these purposes I am going to guesstimate it at about $500 per year for $1 million in term insurance) compared to other costs we take for granted, the cost is miniscule.
Yes, $500 is a lot of money (especially if you don’t have it at the moment), but place it alongside rent/mortgage payment, healthcare, child care, car payments, etc and its relative cost is insignificant. The bad news is that because the chances of actually needing it are so remote (good thing) it’s easy to push off. Your day-care provider expects to be paid this week and if that does not happen there will be immediate consequences.
Dying young and unexpectedly with little kids places an undue financial burden on someone. That ‘someone’ is likely a surviving spouse now faced with being a solo parent (never an easy gig) as well as the breadwinner for the family. Sounds great, doesn’t it? For children of already-single parents it could be exponentially worse: ending up in the care of other relatives or possibly the state.
The solution to this is simple: plan to spend about $500-$1,000 per year on some life insurance. Do a search online of term insurance providers (Nerd Wallet is a fantastic place to do this) and give them the basic demographic data they need to find the best policy at the best price. The term of the policy should be *at least* until your last dependent reaches age 18. I think age 25 is more realistic.
Providing beyond that age is an option but today we’re only talking about requirements. At that price, some people will qualify for a bit more insurance and others a bit less. Don’t sweat the details at this level: we’re trying to make sure your children don’t end up like something out of Oliver Twist.
Also, don’t make this any more complicated than it already is. If a salesman (yes, they’re almost 100% men) wants to sell you anything with cash value, a loan feature, an annuity or mag wheels run away. Policies like that are always sold, never bought. Insurance policies that try to be something other than an insurance policy touting things like tax savings are generally a plague on investors and should be widely shunned by maybe 98.6% of the world.
Right this minute, parents who wouldn’t dream of driving to the grocery store with their kid sitting loose and unbelted in the car are taking a far greater chance on their children’s financial future without owning term life insurance.
Getting Through the Wall
I am a bit unshakeable about a few things. One of them is that a parent has a moral...