When the family’s primary breadwinner passes away due to an unfortunate accident or an illness, the financial repercussions on the dependents can be overwhelming. Circumstances like this make insurance a necessity.
The beneficiaries can use the death benefit to pay for living expenses. If you’re considering getting insurance to build a financial safety net, here are six things you should know before you sign up for a policy.
1. Types of Insurance for Parents
You can choose either term life insurance or permanent life insurance. Term life insurance only covers up to a specific period in 10-, 20, or 30-year plans. If something unfortunate happens to you while the coverage is active, your beneficiaries receive the full death benefits tax-free.
On the contrary, permanent life insurance covers you for as long as you live. As it has living and death benefits, it’s more expensive than term life insurance. You can take a loan against the cash value and use it in many ways, such as supplementing the 20% down payment for buying a house.
2. Cost of Insurance
Another important thing parents should know is the cost of insurance. Many Americans think premiums are expensive, but they’re reasonably priced. The cost of insurance depends on the following factors:
- Sex
- Age
- Smoking habits
- Health and existing conditions
- Driving habits
- Lifestyle and risk for diseases
- Type of policy
A healthy 40-year-old purchasing a 20-year term life insurance with a death benefit of $500,000 pays $26 a month on average. You can ask your agent for the estimated monthly premium.
3. Amount of Coverage Needed
Good parameters to consider when determining coverage are your family’s current standard of living and future expenses, such as college fees. The death benefit is meant to replace the lost income and sustain living expenses for a few years. It also needs to cover the cost of the funeral, especially if you’re the family’s sole earner.
Check how much yearly income your dependents need and how long they need financial support for before they can be independent. For example, if your children are going to college in a few years, you need to factor in their four or five-year tuition. Add it to their annual expenses to finalize the minimum coverage you need. Ask your insurance agent for advice on the right plan for you.
4. Causes of Death Covered and Not Covered
Insurers don’t cover some cases of death. It mainly depends on the cause. The company pays death benefits for the following reasons:
- Natural causes
- Illnesses
- Accidents
- Murder, except if the beneficiary is involved
- Suicide outside of the clause period
Insurers often have a suicide clause period wherein no benefits will be paid if death happens within two years from when the policy is activated. Some causes of mortality where insurers may deny death benefits include:
- Engaging in risky recreation, such as scuba diving and auto racing
- Illegal activities
- Lying on the application
- No beneficiary
- Expired policy
Lying on your application — such as not revealing your existing health conditions — is a huge factor for companies to deny benefits. Insurers investigate roughly 1%–3% of claims for fraud or misrepresentation.
5. What A Life Insurance Payout Can Cover
If you’re the sole provider, the death benefit can help pay for groceries, rent, and other bills, including college fees. Your children can keep living, maintain their lifestyle, and have enough to pay for living expenses. Here are common ways dependents use the life insurance benefit.
Pay Down Debts
Many parents pass away with outstanding mortgages and car loans. If your spouse or children co-sign the insurance agreement, they’ll be liable to pay off the debt. The death benefit can help pay for outstanding debts and lift the financial burden on your loved ones.
For Emergencies
Your dependents can also use the insurance payout for emergency expenses, such as medical bills and house projects. If there’s no immediate use for cash, they can put it in a savings account and build an emergency fund.
Support Their Business
If you signed up for permanent life insurance that builds a cash value, they can use a loan to increase your business’s cash flow, fund a new venture, or as a cash reserve.
6. Cancellation of Insurance
People cancel their life insurance for several reasons, such as:
- They don’t have dependents
- They no longer need it
- They no longer want to pay the premiums
- They have enough financial resources to pay for end-of-life expenses
If you want to terminate your policy, you can do so by notifying your insurer. Depending on the policy’s term, you may have the option to sell the insurance for cash through a life settlement, convert it or get your money back minus the cancellation fees.
Insurance Provides a Financial Cushion for Your Loved Ones
The financial distress your family will bear if something unfortunate happens to you can impact their future. Insurance financially cushions your dependents for a few years until they can make their own living. Some companies even offer coverage that suits your budget.
p.s. Related posts:
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Death and Loss in Middle Grade Literature
Middle Grade and YA books about Intimate Partner Violence (IPV)
Sports Injuries, Insurance and Meeting Desmond Howard
How to Help Your Parents With Retirement
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