A life insurance policy is an agreement between a policy holder and a life insurance company. In exchange for the premiums paid by the policyholder throughout their lifetime, a life insurance policy promises that the insurer will pay an amount of money to one or more named beneficiaries when the covered person passes away.
- Life insurance is a legally binding contract that pays a death benefit to the policy owner when the insured person dies.
- For a life insurance policy to remain in force, the policyholder must pay a single premium upfront or pay regular premiums over time.
- When the insured person dies, the policy’s named beneficiaries will receive the policy’s face value, or death benefit.
- Term life insurance policies expire after a certain number of years. Permanent life insurance policies remain active until the insured dies, stops paying premiums, or surrenders the policy.
- A life insurance policy is only as good as the financial strength of the company that issues it. State guaranty funds may pay claims if the issuer can’t.
Types of Life Insurance
There are numerous life insurance options to suit a wide range of requirements and tastes. The main decision of whether to choose temporary or permanent life insurance is significant to take into account depending on the short- or long-term needs of the person to be insured.
Term life insurance
Term life insurance is intended to last for a set period of time before expiring. When you purchase the insurance, you select the term. The usual durations are 10, 20, or 30 years. The finest term life insurance plans strike a compromise between cost-effectiveness and long-term financial stability.
- Decreasing term life insurance is renewable term life insurance with coverage decreasing over the life of the policy at a predetermined rate.
- Convertible term life insurance allows policyholders to convert a term policy to permanent insurance.
- Renewable term life insurance provides a quote for the year the policy is purchased. Premiums increase annually and are usually the least expensive term insurance in the beginning.
Once the term is finished, many term life insurance policies allow you to renew the contract each year. This is one approach to extend your life insurance coverage, but because the renewal rate is determined by your age at the time, annual rates may increase dramatically. Converting your term life insurance policy to a permanent policy is a superior option for long-term protection. Not all term life insurance policies include this choice; if it matters to you, look for a convertible term insurance policy.
Permanent Life Insurance
Unless the policyholder stops making premium payments or surrenders the policy, permanent life insurance remains in effect for the duration of the insured’s life. It costs more than the term.
- A type of permanent life insurance is whole life. For the duration of the insured person’s lifetime, it builds up a cash value. Additionally, the policyholder of cash-value life insurance is permitted to use the cash value for a variety of purposes, such as a source of loans or cash or to pay policy premiums.
- A type of permanent life insurance with an interest-earning cash value component is known as universal life (UL) insurance. Premium options are adjustable with universal life. In contrast to term and whole life, the premiums can be changed over time and can be created with a flat or rising death benefit.
- The policyholder of an Indexed Universal Life (IUL) policy can receive a fixed or equity-indexed rate of return on the cash value portion of the policy.
- The cash value of a variable universal life (VUL) insurance policy can be invested by the policyholder in a readily accessible separate account. It can be created with a level death benefit or an escalating death benefit, and its premiums are variable.
For most people who take on the adventure of parenting, it is a difficult yet rewarding path. And if you are a single parent, the road may seem even more difficult. This is particularly valid when choosing financial actions.
When it comes to life insurance, single parents frequently have particular queries. Let’s examine some of the most typical queries from single parents that advisors receive.
1. Why do you need life insurance as a single parent?
All households can benefit from insurance, but single-parent households should give life insurance serious thought when planning their finances.
Although it may seem simple, it is crucial for single parents to accept the lack of a second parent. If a single parent passes away, there might not be a clear replacement to help with household expenses or child care, unlike in a two-parent household. Answering certain difficult decisions may be made easier with the help of life insurance, which can offer a financial safety net that might not otherwise exist.
Even though life insurance is crucial, single-parent homes are less likely to have it.
According to one survey, 69% of single parents with children still living at home lacked life insurance. This might be contrasted with the 45% of households with two parents who do not have current life insurance. Making a plan now will ensure that, if you are a single parent, your family is properly protected.
2. What things can life insurance help cover?
The costs that will remain for your children and other dependents after you pass away might be covered with the aid of life insurance. These expenditures may include mortgage or rent payments, debt, current and future educational demands, funeral fees, daycare bills, and so on.
Life insurance is money that you can leave to your loved ones that will typically be tax-free and will let them continue enjoying their life.
3. How much life insurance should you have as a single parent?
The first step in figuring out how much life insurance you need as a single parent is to take into account your way of life, your obligations, and your children’s future care and education. Include any particular or individual financial needs that your family may have, in addition to the things that life insurance can cover as described in the previous question.
Next, we advise using a life insurance calculator like this one to help you better ascertain your needs. You can receive a rough sense of how much money would be needed to support your family in the event that you passed by providing the answers to a few key questions.
In order to discover the greatest policy and price for your needs, you should also speak with a life insurance agent.
4. How do you choose a life insurance beneficiary when you’re a single parent?
Planning for emergencies and the end of life is essential for all single parents. Your friends and family should be aware of what will happen to your dependents in the event of your passing. Therefore, even though it’s a sobering talk, you must include life insurance in your end-of-life plan discussions.
In most cases, a parent will designate their spouse or the other parent of their child(ren) as the beneficiary (person who gets the death benefit cash payout). However, if there is no other parent present, you must first select who will look after your kids if you pass away.
Second, are you confident that person will be given the funds necessary to take care of your dependents? They don’t need to be the same individual. You can appoint someone independent of the principal caregiver to administer the estate of your dependents if you have a reliable individual or qualified expert in mind. You’ll need to consider how you want your kids’ financial needs to be met without you. To strengthen your plan, we advise speaking with your family and any dependable financial or estate experts.
Whatever you do, avoid designating your child as the beneficiary since the law forbids anyone under the age of majority from collecting a life insurance claim (which could be 18 or 21 depending on your state). To learn more about designating beneficiaries.
5. What type of life insurance should a single parent have?
Nowadays, there are many different types of life insurance, but to get you started on picking the one that is ideal for you as a single parent, here are a few common possibilities.
Term Life Insurance
Term insurance is a fantastic alternative if money is tight or cash flow is constrained, as it sometimes is for a single parent. If you pass away during the duration of the policy, term insurance offers a cash benefit to your beneficiaries. You pay a monthly premium to keep the insurance active in exchange for the death benefit. If you stop paying the premium on a term policy, the policy will expire and the benefit would be lost. For as long as you require it or can afford it, it is only temporary coverage.
Usually, a single parent can find a premium payment on a term coverage in their budget. Also keep in mind that you must pass underwriting for any insurance policy before receiving it and learning how much it will cost.
Permanent Life Insurance
Next, there are permanent life insurance policies.These frequently have higher monthly premiums but offer a comparable death benefit to a term policy of the same size. A perpetual insurance plan, however, will also accrue cash value in addition to death benefits.
After a set amount of time, the policy’s cash value becomes available for use or borrowing. When you take out a loan against a permanent insurance policy, the cash value is used as security, and the interest rates are often modest.
A universal life insurance policy might be more your style if the concept of a more permanent coverage appeals to you, but you are concerned about having the money on hand to pay the payments each month.
Flexibility is essential when you’re a single parent with one source of income. You can change the policy’s payment amounts more easily with a universal life insurance policy. Working with an insurance professional to create a policy that is ideal for your requirements and circumstances is a good option if you are thinking about a universal coverage.
Even though being a single parent is a difficult job, having life insurance in place for your kids can help reduce some of the burden. If you haven’t done so already, get in touch with a reputable insurance expert for assistance in beginning the process of insuring your peace of mind.