Family Life Insurance

Can you buy a life insurance policy for a family member? And how do you calculate coverage? Read on to learn if family life insurance is a good investment for your loved ones.

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Life insurance can create financial security for your family and loved ones after you're gone. But the right kind of coverage depends on your particular circumstance. Read on to learn more.

Buying Life Insurance for Yourself

Unsure whether you need life insurance? Consider these two questions:

1. Does anyone rely on me for financial support?
   This includes your children, spouse or partner, co-signors of debt or loans you have in your name, or elderly parents you are, or will in the future, have to care for.

2. Do I have enough money in my savings to provide that support?
   If someone does rely on you for financial support but you do not currently have enough savings to provide it, chances are you need life insurance coverage.

We'll cover your options and how to calculate the right amount of coverage below.

Buying Life Insurance for Your Partner

Whether you recently got married or you've been married for years, you should consider life insurance for your partner. This is particularly important if you have children.

You cannot easily purchase life insurance for your spouse without involving them, or vice versa. This is to help prevent insurance fraud or other criminal acts.

To purchase a policy for someone, you must:

• Prove insurable interest (see definition above).

• Make it through the underwriting process, which includes knowing all of the person's health information. Many policies are medically underwritten, which means the person for whom the policy is for must take a medical exam as part of the approval process.

• Have the other person sign the policy and give consent (signing for the other person is fraud).

Policy Options

You have two options for insurance with a partner: separate or joint policies.

Separate Policies
You and your spouse apply for coverage, pay separate premiums, and select your own beneficiaries. This is the most common ways for spouses to purchase life insurance.

Some benefits include:

• The approval for the policy doesn't depend on anyone except you. That means your partner's age or health status won't determine whether you are or are not approved for coverage.

• You can tailor each policy for your individual needs. Perhaps you want the stay-at-home parent to have a lower coverage amount than the parent who works full-time. Or, maybe you want one of you to have longer-term coverage or extra policy add-ons.

• You can schedule a joint medical exam to make the process faster.

Joint Policy
This type of policy covers both of you. You have the option to purchase either a Term or Permanent policy (more on that below).

This type of coverage has two main selection considerations: first-to-die or second-to-die.

1. First-to-Die
   When you purchase a first-to-die joint policy, you and your spouse order yourselves as the first and second policyholder. In this case, the death benefit will pay out when the first policyholder dies.

   This policy serves as income replacement for your spouse (or other beneficiaries) to ensure your family is still taken care of once you are gone.

   You may be best suited for this policy if you have a young family, a mortgage, or anyone who will need financial assistance after your death.

   This coverage is typically more expensive. Also upon the first policyholder's death, the surviving spouse needs to apply for another policy if they still want coverage.
   

2. Second-to-Die
   Also called survivorship life insurance, the policy doesn't pay out until both policyholders die. The death benefit would then pay to their listed beneficiaries, just like an individual policy.

   If there's a long period of time between the deaths of the policyholders, it takes longer for the death benefit to be paid.

   This type of coverage is well-suited for estate or inheritance taxes or as a legacy for heirs or beneficiaries.

Buying Life Insurance for Your Kids

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While purchasing life insurance for yourself and your spouse is necessary, life insurance for your children probably isn't. But here are a couple good reasons to consider a child life insurance policy:

• To have a small death benefit to cover funeral expenses.

• To allow you to take time off work to grieve.

• If it's likely your child will develop a medical condition that will disqualify them later in life from a traditional policy.

Options for Children

Child Life Insurance Policies
These are basically the same as a whole life insurance policy you'd purchase for yourself. Some parents are attracted to this option because the policy has an investment portion and builds cash value. It can help save for the child's future through protection and interest-earning savings.

However, there is a catch. Depending on policy, the interest/cash value is earned at a predetermined rate set by the insurance company. Unless the policy guarantees minimum cash value, the growth rate can fluctuate year-to-year based on the earnings/profit of the company. The cash value may not be greater than the premiums you paid in the end.

As far as the dollars invested, you do not have the option to select where or how to invest. Instead, it's up to the insurance company. You may find that you can invest in a better fund on your own or through a financial advisor.

This option also costs more than the other alternatives.

Child Rider on a Term Policy
Most insurance companies offer this option when you purchase a policy. The rider would provide a death benefit if one of your children passes away. Typically, this rider covers all of your children (assuming you have multiple).

Most child riders range between $1,000 and $10,000 in coverage. For $10,000 of coverage, you would probably only pay around $50 per year.

Is Child Life Insurance a Good Investment?

Most experts would say no. Here's why:

• Your child has no income that is going to need to be replaced if they die.

• The interest/cash value is earned at a predetermined rate set by the insurance company. Unless the policy guarantees minimum cash value, the growth rate can fluctuate year-to-year based on the earnings/profit of the company.

• There are a variety of fees associated with the policy that decrease the actual cash return.

• The chance that your child will not qualify for a policy in the future is slim.

• The insurance they are going to need as an adult will be much higher coverage than what they can qualify for as a child.

Alternatives to Child Life Insurance
If you do determine you want some sort of investment or protection for your child but life insurance isn't the best option, there are a few alternatives you should consider.

• 529 Plan
  A tax-advantaged savings plan, also known as a "qualified tuition plan," is designed to encourage savings for future education costs.

  Contributions grow free of federal and state income taxes, and no income taxes are paid on the growth of the account when withdrawals are used for qualified expenses.

• IRA
  An Individual Retirement Account, or IRA, is an investment account that offers tax breaks for investing dollars for retirement. You add money over time and use it to purchase investments, like stocks, bonds, and mutual funds.

  Eventually, the money can be withdrawn for retirement. Contributions are tax deductible, the investments are tax-deferred, and you can contribute a large amount each year.

• Custodial Account
  This type of account is set up by the parent and used to save money you don't want your child to have access to yet. When you put funds into this account, it belongs to the child (not you).

  Money can only be used for expenditures that benefit the child. Your child gets access to the account at age 18 or 21 (depending on the state you live in).

  One downside? If the amount exceeds a certain total, the child will have to pay taxes on it.

Buying Life Insurance for Your Parents

Technically, you can't purchase life insurance for your parents. Similar to purchasing it for your spouse, you have to prove insurable interest, which is very difficult as an adult child.

However, you can talk to them about their options. These include:

• Helping them purchase their own life insurance policy and name you as the beneficiary.

• Set up a savings or investment account to put aside money for end-of-life expenses.

• Pre-pay funeral costs through their selected funeral home.

If you are determined to buy a policy for your parents, there is one option that's easier to get. Read on to learn more.

Final Expense Insurance
This type of policy is a form of permanent insurance for which you pay premiums until your parents die. You still need your parent's consent to apply for this policy, but there is no medical exam required, so it's easier to qualify.

Typically, Final Expense Insurance is available for amounts ranging from $5,000 to $25,000, and premiums can range from $50+.

Life Insurance Basics

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Life insurance can be confusing. Here are some things to know before you get started.

Terms to Know

You'll likely come across these words when buying a policy for another person:

• Named Insured
  The person whose life is being insured by the policy.

• Policy Owner/Policyholder
  The person who owns the policy and can make changes.

• Insurable Interest
  If the Named Insured and Policy Owner are two different people, the Policy Owner has to prove to the insurance company that they have "insurable interest" in the Named Insured. This means they will suffer financially if the Named Insured dies. You cannot purchase a policy on someone unless you can prove Insurable Interest.

• Beneficiary
  The person who receives the death benefit, or policy payout, after you die. This can be one person, multiple people, or an organization (like a nonprofit). You will name this person when you purchase the policy, but beneficiaries can be updated throughout the life of the policy, if necessary.

How Life Insurance Can Help

When you die, your life insurance payout could go towards:

Funeral expenses
The National Funeral Directors Association reports the average funeral costs between $6,000 and $9,000 (not including the cemetery plot, monument or marker costs, flowers, obituaries, etc.)

Medical expenses
These are deductible, copay, and/or coinsurance costs that will vary depending on the state of your health before passing and the coverage your health insurance provides.

Paying off remaining debts
Some of those debts can include:

• Student Loans
  The average amount of student loan debt is between $28,000 and $40,000, depending on the year you graduated. In 2017, over 44 million Americans collectively owed nearly $1.5 trillion in student loan debt.

• Credit Card Debt
  The average American has a credit balance of nearly $6,500, according to Experian's annual study on the state of credit and debit.

• Mortgages
  The price of your house, total of your down payment, your loan program, and loan interest rate affect your monthly mortgage. The average monthly rate is about $1,500.

What remains of your life insurance is used to help your family with additional expenses.

Mainting or Buying a Home
The median cost of a new house is $322,637.

Sending Kids to College
Average cost of tuition for private colleges is $34,740 per year, for in-state public colleges $9,970 per year, and for out-of-state public colleges $25,620 per year.

New Car
Average cost of a new car in 2019 is $34,000.

Paying Medical Bills
Monthly premium for a family health insurance plan averages $1,168.

Childcare
If your spouse or partner has to go back to work or continue working, it could cost $10,000 or more per year for just one child.

Replacing a Parent's Income
At-home duties include cooking, cleaning, laundry, carpooling, childcare, running errands like grocery shopping, and more. Think about how much it would cost to pay a third party to do those things—that loss of income can add up quickly.

Outstanding debts and other costs incurred before, when, and after you die can add up quickly. If you do not have a life insurance policy, payment for these expenses will fall to your family to pay out-of-pocket. This could total hundreds of thousands of dollars, which can be very difficult (or even impossible) to afford, putting your loved ones in a difficult financial position.

Types of Life Insurance

There are four primary types of life insurance coverage: Term, Whole, Universal, and Variable. Each one has pros and cons, including coverage amounts, length of coverage, and price.

Term
This is the most popular type of policy, largely because it costs less than other types of life insurance. Term life insurance provides coverage for a certain period of time, or term.

It is designed to ensure protection for your loved ones should you die prematurely. With this policy, your beneficiary receives the full death benefit if you die within the years of the term. The most common terms are 10, 20, and 30 years, though some companies also offer 15- and 25-year options.

Whole
This provides lifelong coverage and includes an investment and cash value component. Because this type of policy typically involves investing dollars, the cash value account will grow over time.

You can normally access the cash value any time through withdrawals or loans, which you can use for retirement, emergency funds, or other bills.

Whole life insurance premiums are typically higher, but they have guaranteed level premiums for life. This type of policy also has a guaranteed death benefit.

Universal
Universal Life Insurance provides a permanent death benefit and has added cash value (similar to Whole life). When you pay your premiums, part of the dollars go into a cash account that is credited each month with interest, and part goes towards paying the death benefit.

Your premiums are not fixed, so the amount you pay can change month-to-month. But, you have more control and access to the dollars that go into the cash account.

Variable
Similar to Universal Life, part of your premium is contributed to a cash account. But a Variable's cash value can be invested in a variety of different accounts, similar to mutual funds.

The choice of which accounts to invest in is up to you. Examples of investment funds are stocks, bonds, equity funds, and money market funds.

Which option is best for your needs?

Choose a Term Policy If:

• You only need life insurance to replace your income over a certain period, such as the years you're raising your children or have an outstanding mortgage.

• You want a simpler, more affordable policy.

Choose a Whole Policy If:

• You want to provide money to your heirs to pay estate taxes.

• You have lifelong dependents, such as a child with special needs.

• You want to spend your retirement savings but still leave an inheritance for your beneficiaries.

Calculate Your Insurance Needs

Before you begin shopping, determine how much coverage you actually need. This includes the total amount of coverage, as well as length of the policy coverage.

In the most basic terms, your policy should be able provide the financial support that you will no longer be able to provide with your income and assistance, both now and in your family's future.

There are multiple ways to calculate your needs, including using life insurance calculators you can find online. Here is a simple way:

1. Consider how many years would you like coverage, and multiply your annual income by that number of years<.

2. For example, if you want a 10-year term policy and earn $60,000 per year, you'll want a minimum $600,000 policy.

3. Think about other financial obligations you want your policy to cover. This can include:
   1. Funeral costs
      
   2. Mortgages
      
   3. Student loans
      
   4. Credit card debt
      
   5. Medical bills
      
   6. Raising children

   Add these totals to the sum found in Part 1.

4. Determine what services you provide that would have a cost to replace.
   This is particularly important if you are a stay-at-home parent and your partner wouldn't be able to quit their job to provide the services you do. Add the replacement cost to Parts 1 and 2.

5. Do you have any savings or life insurance through a current employer?
   Subtract those totals from your determined policy amount.

   Most places of employment offer a life insurance policy for full-time staff. This is usually 1-3 times your current salary—that's likely less coverage than you'll need. Also, if you leave that job, you lose the coverage.

Choosing a Beneficiary (or Beneficiaries)

A beneficiary is who, or what, will receive the payout of your life insurance policy when you die. The rule of thumb is you should name the person (or people) who will be most financially impacted by your death.

Primary Beneficiary
One person, multiple people, or even an organization like a nonprofit as your beneficiary.

Contingent Beneficiary
Is a person who will receive the death benefit if your primary beneficiary cannot. For example, if your spouse is the beneficiary and your parents are contingent beneficiaries, they would receive the death benefit if you and your spouse both die at the same time.

To learn more about naming a life insurance beneficiary, read our article here.

Find the Right Life Insurance Company

With more than 800 to choose from, how do you even know where to start?

Start by finding the right life insurance agent.

There are two main types:

• Captive Agents
  These people work for one insurance company. They are not able to quote you with different companies in order to find the best premium options for you.

  Their company also might not offer the type of policy or specific coverage you need because not every life insurance company is the same.

• Independent Agents
  These agents typically own their own business and represent several insurance companies, or carriers. They are able to quote with different carriers and sell products that are best for you and your budget.

  They often have significant understanding of life insurance, the market, and the products that are available to you.

Bottom Line

A life insurance policy offers financial protection that can ease the burden after you die. It may be tempting to purchase a policy for the important family members in your life.

While you should definitely consider life insurance for you and your spouse, you may want to consider other options when it comes to your children and parents.

Talk to an agent or financial advisor to determine which options are right for you and your family.