It may take a village to raise a child, but as a single parent, it can feel like it's all up to you. Paying the bills, keeping the fridge stocked, teaching and nurturing — there's a lot to shoulder.
So what would happen if you were no longer around? It's a crucial question to consider.
Buying life insurance is an important step to making sure the kids would be OK if something happened to you. Here's what you need to know.
Life insurance isn't just for married couples
A common misconception is that married parents need life insurance more than single parents. In a recent survey, 82% of respondents said married parents with young children needed life insurance, compared to just 60% who said the same for single parents. That finding came in the 2017 Insurance Barometer Study by Life Happens, a nonprofit supported by insurance companies and brokerages, and LIMRA, a global life insurance research and development organization.
The truth: If your death would hurt anyone financially, then you need life insurance.
“There’s no question that the actual need for life insurance by single parents is, at a minimum, equal to married parents, if not greater," says Todd Silverhart, corporate vice president at LIMRA.
You should have coverage whether you're the sole provider or you share financial responsibility with your child's other parent. If the other parent helps support the kids, then that parent should have coverage, too.
Types of life insurance
Life insurance pays out if the person insured by the policy dies. The money goes to the life insurance policy’s beneficiary, who is named by the person who buys the coverage. There can be more than one beneficiary.
There are two main types of life insurance — term and permanent, such as whole life.
Term life is designed to cover you only for the years you think you'll need life insurance, such as when your kids are growing up. You buy a policy to cover you for a certain period, such as 10, 20 or 30 years. The policy pays out if you die within the term. Term life is sufficient for most families, and it’s cheap. You can compare life insurance quotes online.
Whole life insurance and other types of permanent policies cover you for your entire life. They also include a savings component known as “cash value,” which grows slowly tax-deferred. After years of growth, the policy owner can borrow against the cash value or give up the policy for the cash value. Permanent life insurance is more expensive and complicated than term life. It’s best to work with a financial advisor if you’re interested in permanent coverage.
» Learn more: Read about the differences between whole life and term life insurance.
How to afford life insurance
Term life is affordable and fits the bill for most single parents.
A healthy 30-year-old can buy $250,000 of coverage for 20 years for about $160 a year, according to LIMRA and Life Happens. That's less than $14 a month.
The price of life insurance is based primarily on your age, health, lifestyle and the amount of coverage. The younger and healthier you are, the cheaper the price.
“Buy now before it gets more expensive,” says Brian Madgett, vice president at New York Life Insurance Co.
Life insurance prices vary by company, so get life insurance quotes from several insurers to find the best price.
Deciding how much to buy
Think about your kids’ financial needs to decide how much life insurance to buy.
Add the following:
The cost to pay off the mortgage and other debts.
Your annual income multiplied by the number of years you’d like it replaced. A common recommendation is at least seven years.
Long-term expenses, such as the cost of sending your kids to college
Then subtract any savings or other life insurance coverage you already have to estimate how much to buy.
When buying term life insurance, choose a term that lasts until the youngest child has graduated from college.
Naming the life insurance beneficiary
Take care in naming the beneficiary. Life insurance companies cannot pay money directly to minors. If naming your children as beneficiaries, you’ll also need to name an adult custodian on the policy to handle the money for their benefit, Madgett says. The children will receive any unspent life insurance money when they reach the legal age of adulthood.
If only the children are named, the court will have to appoint a custodian. That process will cost time and money, and may not result in the person you’d want, he says.
Another option is to work with an attorney to set up a trust for the benefit of the children and name the trust as the beneficiary. When creating the trust, you spell out the rules for how the money should be used and name a trustee to manage the money according to the trust directions.
“With a trust, you’re in control even though you’re not living,” Madgett says.
Although 18-year-olds are legal adults in many states, most parents wouldn’t want their kids at that age getting a large sum of money. With a trust, you can have the money managed by the trustee until the children reach a set age, such as 25 or 30.