Is Life insurance a Good Idea?

Is Life insurance a Good Idea?
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According to the U.S. Department of Agriculture, a middle class family raising a child to adulthood will spend over $233,000 on that child between the ages of 0 to 18. That doesn't even factor in the cost of college education, which can be thousands of dollars more per year once a child reaches adulthood.

Nasdaq’s recent article entitled “Having a Child? Now Is the Time to Get Life Insurance” explains that parents usually want to make sure that their children are provided for — even in a worst-case scenario where that parent doesn’t survive until the child’s adulthood. That is the big reason why it is so essential to get life insurance when a child is born if the parent doesn’t have it already.

Parents must make sure they are as financially prepared as possible if they die suddenly, and purchasing term life insurance is frequently the best way to do that. A term life insurance policy is in effect for a limited period, like 20 years. Parents can buy a policy that will cover their life for as long as they expect their child to be dependent on them for financial support.

Parents who get term life insurance can be sure there’s money available to provide for a child into adulthood and cover that child’s education.

Term life insurance can be a cheaper way to obtain this type of protection than whole life insurance and is usually all that is necessary. This is because children eventually become financially independent after several decades. However, parents whose children are disabled and who will require lifelong care may wish to buy a whole life policy, so a death benefit will always be paid out.

When purchasing term life insurance to protect a child, parents should consider who to name as the beneficiary. Typically, naming the child the beneficiary can create legal complications because children under 18 cannot legally manage the life insurance proceeds. Also, giving a large lump sum of money to a child who’s just 18 could create problems with wise money management.

It may be wise for the parent purchasing coverage to name the other parent or a trust for the child as the beneficiary of the death benefit. That parent can use the money to provide financial support. However, in instances where the person purchasing coverage doesn’t necessarily trust the other parent to use it wisely, there are different approaches such as creating a trust, appointing a trustee to manage the funds on behalf of the child, and naming the trust as the beneficiary.

Parents should speak with an experienced estate planning attorney if they have a more complex situation.

Reference: Nasdaq (Dec. 12, 2021) “Having a Child? Now Is the Time to Get Life Insurance”