Exclusive: What Every Parent Needs to Know About Life Insurance
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UPDATED: May 29, 2020
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Many parents would agree that one of the scariest things to do is raise children. Protecting them becomes the top priority. So why wouldn’t you protect them by having life insurance?
Even though life insurance can seem confusing and overwhelming, parents need to understand life insurance. Life insurance financially protects your family from the burdens that come along with a loved one passing.
This article lays out the basics of what life insurance is, who should have it, and how to buy it. Jumping on board with the first policy from the first company you look at isn’t the way to find the best plan for you.
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What is life insurance?
Death is an unavoidable truth in life, and when one dies, they leave behind their family. Unfortunately, they also leave behind their debt.
Their families take on that debt and also have to pay for the final expenses of their loved ones. A person who is still suffering from the loss of someone can become overwhelmed by the reality of what the loss of income means to them. Life insurance exists to help in these situations.
A life insurance policy is a contract between an insurance company and the policyholder. The policyholder pays the insurance company a premium.
In exchange for the payment, the insurance company agrees that if the policyholder dies, a cash payout — also known as a death benefit — will be given to the designated beneficiary.
Beneficiaries are discussed later in this article, but first, let’s take a look at this video to highlight some other topics you’ll see further down the page.
Life insurance is something you pay for, typically every month, to protect your family financially in the event of your passing. The money is to replace income and pay any debt.
Life insurance can also be used to pay funeral expenses. In 2019, the average cost of a funeral was $7,640. Not many people have that kind of change lying around.
Most people should buy some amount of life insurance, but it’s especially important for those who have dependents. The following section will further describe who should have life insurance and why.
Who Should Buy Life Insurance
There is a wide array of people who should buy life insurance. Whether you’re single or married or if you have debt from student loans, car notes, or a mortgage, you should get life insurance to help your loved ones pay your bills.
Dependents are another reason to get life insurance. When children are young, they may require child care, and as they grow, extracurricular activities and college will demand even more money.
Life insurance provides financial protection for the expensive things in life — a mortgage, child care, and student loan debt.
Life insurance can help parents protect the future they see for their children by making sure the money is there even if they can’t be. After the children are grown and out of the house, it would be a perfect time to reevaluate your finances and savings vehicles to be aimed at retirement.
For the sake of this article, let’s focus on new parents, single parents, and stay-at-home parents.
Let’s say you’re in your mid to late 20s. You’ve just bought a new house, which means you owe the bank $250,000. In less than a year, you’ll be a parent to a child that will cost you $200,000 to raise, at least.
You just bought a new car for $20,000. You’re also most likely going to help pay for college, which we all know can cost an arm and a leg. In total, you could be dishing out over $500,000 over the next 20 or 30 years.
Now say you or your spouse don’t return to work full time after the baby is born. By relying heavily on one income instead of two, the amount of money being set aside in savings is most likely going to diminish.
Then life takes over, and for most of it, all you can do is buckle up and enjoy the ride. Of course, everyone has goals and dreams, especially those involving financial freedom.
Unfortunately, tragedies do occur, but though a parent may die, their family will survive, and life insurance helps protect families from having their dreams crumble after losing a loved one.
As new parents, you don’t necessarily need life insurance forever. Still, it’s wise to be covered until your little ones grow up and no longer depend financially on you.
Many people out there don’t always have the luxury of being able to raise their children with someone else. When you’re the sole provider for your children, it’s even more critical to have life insurance.
If you are all your child has, imagine what it would be like for them if something terrible happened to you. Who would take care of them? How are they going to be financially cared for?
These types of questions can’t be avoided even if the thought is unpleasant. No one can predict when their life may be cut short.
Single parents need to consider carefully when deciding who to name as a beneficiary for their life insurance policy. Beneficiaries, including the difference between primary and secondary, are described more in detail later on.
But you should know that naming a minor as a beneficiary can cause legal complications. There are ways to name your child as a beneficiary, such as through a trust. How does a trust work? Watch this video to find out.
The main goal, besides having the child financially set, is to have them under the guardianship of someone with whom you are comfortable.
The best way to go about designating a legal guardian is to first discuss it with that person. Once there is an agreement, setting up a will with such instructions would be the next recommended step.
Throughout American history, women were often the ones who stayed at home, raised children, and didn’t have a job outside of the home. In the past half a century, though, there has been a notable shift in social acceptance about women in the workforce.
There has also been a shift in the acceptance of more fathers committing to being home to raise their children as a stay-at-home parent. Now, of course, there are many households that have both parents working outside of the home, but for now, the focus will be on stay-at-home parents.
The duties and values of a parent who stays at home can sometimes be overlooked when talking about finances; such an oversight can leave many of those parents without life insurance or needing more coverage than what they have.
Salary.com has calculated what an annual salary for a stay-at-home parent would look like. Most of us know that parenting is a multi-faceted responsibility, but we may not always appreciate just how much they do:
Here are a few examples of positions that factored into the hybrid role of a stay-at-home parent.
- Art/Athletic Director
- Event Planner
- Logistics Analyst
This is only a third of the roles taken into consideration. The final salary for a stay-at-home parent in 2019 equaled $178,201.
Then there are the parents who still manage to work another job from home on top of being a stay-at-home parent. If that’s you, kudos and hang in there.
When a stay-at-home parent passes away, new bills arise — child care, cleaning, and cooking — to varying degrees.
The duties of such a parent have to fall onto someone and oftentimes have to be outsourced.
Time and effort can be worth more than anyone initially considers. Having a life insurance policy to limit any financial stress is a good idea for any parent.
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How Life Insurance Works
Feeling overwhelmed about life insurance is unnecessary; life insurance can seem way more complicated than it really is.
When you purchase a policy, the insurance company will require a monthly payment, also called a premium.
That premium is to guarantee a payout or death benefit upon the policyholder’s death to the beneficiary named in the policy.
Not all policies are the same; some have a term limit, some have a cash value portion, and some only cover final expenses. Let’s take a look at the different types of policies and who is best suited for each.
Types of Policies
When searching for a life insurance policy, you need to understand the variety of options out there. For starters, you must choose between a temporary or permanent policy.
Temporary policies, also called term policies, typically have term limits of 10, 20, or 30 years while permanent policies, such as whole and universal life insurance, stay in effect up until death. Note that there are benefits and drawbacks to each type of policy.
Let’s dive deeper into what term, whole, universal, and burial and final expense policies are all about.
Out of all the different types of life insurance, term is the cheapest and most common. As mentioned before, life insurance is essential when you have financial obligations such as a mortgage, student loan debt, or college expenses.
Term life insurance is there to protect you while you’re paying for these things.
If you were to pass with outstanding debts, it would all fall onto your family’s shoulders. Death is inevitable, so why not protect your family’s financial future for a few hundred dollars a year?
Typically mortgages are 30-year terms, student loans usually take 10 or 15 years to pay off, and going from a newborn to a college graduate takes about 22 years; a 30-year term life insurance policy usually suits people’s needs and budget.
However, most insurance companies offer 10-,15-, 20-, and 30-year terms. The most common coverage amounts are $100,000, $250,000, and $500,000.
Whole life is the first type of permanent life insurance we’ll discuss. Whole life comes with a death benefit just like term life, but also has a cash value or living benefit as well.
Check out the video below that summarizes how whole life works.
Cash value is the portion of a whole life policy that acts as a savings vehicle. The policyholder may borrow against and, in some cases, withdraw from the cash value.
Mutual insurance companies often pay annual dividends to their customers and deposit them directly into the cash value portions. Whole life policies accumulate interest over time.
You may be asking yourself: why is term life more common when whole life sounds like a better deal?
First off, whole life policies are significantly more expensive than term life; whole life can cost five times more than a term policy.
It’s easy to blame the extra cost on the cash value portion of the policy. If you’re trying to save money, investing it in your life insurance policy usually isn’t the best move.
Some people can afford the higher premiums and feel just a bit more comfortable with another cash safety net to borrow from if need be.
Here in the 21st century, people are waiting longer to get married and have babies. This period of waiting can sometimes be a financial launchpad, where 401(k)s and IRAs are established and maybe some other money market investment, as well.
Having all those things already in place and still being able to afford a whole life policy is the ideal situation to buy a whole life policy. So even though it’s possible to handle a whole life policy as a young new parent, whole life policies are better framed for those in middle-age.
Some of you may not be convinced of the policy you buy. The great thing many companies do is allow term life policies to be converted into a whole life policy later.
But if flexibility is what you’re looking for, look on to the next section because universal life might be the type for you.
For those of you on the fence when it comes to term or whole life, universal life may be for you. Universal life is similar to whole life, but there are a few differences.
There is still an investment savings portion, but the premiums tend to be lower than whole life.
The one thing that universal life has that neither of the other policies has is flexibility — when to pay, how much to pay, the size of the death benefit, and a bigger say in how you invest your money.
The cash value part also behaves differently in a universal policy than a whole life one. Universal cash values are closely tied to the stock market and the balances can fluctuate just like the stock market.
Investment-savvy people would have the most success with universal life, but most of us would benefit from keeping our investments and life insurance separate.
Burial & Final Expenses
Burial and final expense insurance can be either term or permanent, depending on the parameters of the policy. However, coverage from such a policy is relatively small in comparison to a standard life policy.
It’s common to see burial and final expense plans have only $5,000 to $20,000 worth of coverage. That’s a big difference from the several hundred thousand dollars other life insurance options offer.
Usually, this type of policy is attractive to seniors who can’t qualify for more extensive coverage.
Funeral homes are often able to sell burial and final expense insurance. In fact, sometimes funeral homes will sell what they label as “burial insurance,” but it often is referring to a prepaid arrangement. Typically, prepaid arrangements aren’t the best choice.
Many things can change over the years, including funeral homes going out of business or you wanting to move to be closer to your family. Most likely, you won’t receive a refund on prepaid arrangements.
If there are specific wishes you have or a certain funeral home you want to use, let your next of kin know as well as include it in your will.
The above types of policies are the broad explanations of the common routes to take with life insurance. But of course, there is usually more to it.
For example, many people will have the opportunity to purchase life insurance through their employers. Employer-provided coverage is group insurance, which comes with benefits as well as drawbacks.
The terms that your employer agrees to dictate what percentage of the policy you’ll be responsible for funding. Due to the group aspect of it, rates can sometimes be higher for those who are young and healthy than they would if an individual policy was purchased.
Another part of life insurance is the available riders, with some of the standard riders including child, accidental death, accelerated death benefit, and long-term care.
Other options to consider are policies that include both parents. Joint life insurance has many benefits. It can help consolidate payments and allow for extra security when it comes to protecting your family when the inevitable happens.
Why Should You Get Life Insurance
Even though nobody wants to talk about their death, at the back of many minds is the question: what would happen to my loved ones if I’m not here to support them?
Life insurance can provide a solid answer to that question. Peace of mind can often be hard to come by in our non-stop and often stressful daily lives. So why not have one less thing to worry about?
No one would prefer that their family be left financially unstable rather than secure. The death benefit from a life insurance policy can easily provide that security.
The death benefit is a cash payment a beneficiary receives when a life insurance policyholder dies.
The beneficiary is designated at the same time the contract is signed. It’s possible to change your beneficiary whenever necessary.
If a beneficiary dies before the policyholder, the beneficiary must be replaced as soon as possible; it would be a shame for a life insurance policy to go to waste because of not having an up-to-date beneficiary listed.
When someone with life insurance dies, the beneficiary must make a claim. The easiest way to do this is by contacting the insurance company that oversees the account directly. Occasionally, companies will have a way to make a claim online.
This video explains what you will need to do to file a life insurance claim.
Death benefits are supposed to replace income, which means that the beneficiary can spend the money in whatever manner they see fit.
Usually, such things would include covering the basic cost of living (mortgage, utilities, food), paying any outstanding debts, or helping to pay college tuition.
Losing a loved one causes enough turmoil in people’s lives, so finances should not be allowed to cause grief to intensify.
You can use an online life insurance calculator to help you better grasp how much coverage you should be buying. Often it’s more than expected. Everyone’s lives and standard of living are different, so it’s essential to take your time when deciding.
Usually, it’s a good idea to have life insurance on both parents, even if one is a stay-at-home parent. Sometimes it’s difficult to see someone’s value until they are no longer there.
Choosing Your Beneficiaries
A beneficiary is a person or institution that receives the death benefit portion of a life insurance policy upon the policyholder’s death. When coming to a decision on who to name as your beneficiary, keep in mind who would be affected the most financially by your death.
There are a few options when it comes to naming a beneficiary. You can name:
- One person
- Two or more people
- The trustee of a trust that you’ve set up
- A charity
- Your estate
In most cases, your beneficiary is going to be your children, spouse, or another family member. Another thing to be aware of is that there are two levels of beneficiaries: primary and secondary.
Let’s take a look at what each type entails and a few tips as well.
Just as the name implies, primary beneficiaries are first in line to receive a death benefit. If you choose not to name your spouse, some states require a spousal waiver form to be signed.
There are also some issues to think about if you’re planning on naming a minor. Due to legal complications and age restrictions within the policy, naming a minor isn’t in your best interest.
If your child is the only one you wish to leave your money and assets to, you should set up a trust instead.
A trust would ensure that a third party controls the money for the child. Specific instructions may be left at your discretion as to how and in what quantities the money should be given to the beneficiary.
Another name for the secondary beneficiary is the contingent beneficiary. Typically this person or entity only receives a death benefit payment if the primary beneficiary is deceased.
Even if the death benefit ends up with the contingent beneficiary, certain limitations can be set at the policyholder’s discretion — similar to how a trust would have limitations.
A few examples of those limitations would be having to graduate college or not receiving it until they are 21.
Think about a backup plan because life is unpredictable and you want your money to go to the right parties.
How to Get the Best Rate
All it takes is a little research, effort, and good luck to get the best rate for life insurance. Luckily for you, the research part is already underway.
To get the best rate, you must know what causes rates to differ. It’s also good to be honest with yourself about personal characteristics that could increase your rates.
Factors That Affect Your Rates
Insurance companies can be invasive and will use many different factors to determine your rates. The insurance companies’ goals are to maximize profits and the number of premiums while minimizing and assessing the risks.
Take a look at this video that explains how a life insurance company examines the factors that will affect a person’s monthly premium.
The insurance companies look at factors that are completely out of anyone’s control, such as age or medical history. Other elements are based on making good choices often.
By knowing what negatively affects life insurance rates, you can optimize all your positive attributes.
Age is a huge factor for life insurance companies when it comes to setting a price for life insurance premiums. In a perfect world, we would all grow old and die of natural causes. Insurance companies take the theory into consideration.
The younger you are, the longer life expectancy you have, and the less likely the insurance companies will have to pay out soon, causing rates for young people to be inexpensive. The opposite is true the older you get.
Many companies only sell burial insurance to those considered seniors, generally 55 years and up. The fact that burial insurance is only for the elderly makes the premiums more expensive.
Another demographic is gender. This is a factor that lies outside of your control when it comes to affecting life insurance rates.
By now, it’s common knowledge that women tend to live longer than men. On average, men pay 38 percent higher premiums than women. Elderly men seem to have the short end of the stick.
Remember, insurance companies are trying to play the game with the best odds in mind. A more individualized factor is one’s medical history.
Since same-sex marriage was legalized nationwide in 2015, insurance companies are rising up to meet the needs of LGBTQ families. (Related: Best Cities for Same-Sex Couples)
Current & Family Medical History
The first thing life insurance companies insist on happening before they’ll agree to insure you is that a medical exam must be performed. These types of medical exams are overall physicals.
Blood will be drawn to check your cholesterol levels and a variety of other things. Checking for high blood pressure is one of the most common procedures as well. Many steps are taken to evaluate the risk of having a heart attack.
Insurers may also request your full health records as well, so any previous conditions or medications may cause your rates to increase.
Pre-existing medical conditions often harm life insurance rates — some more than others. Let’s look at diabetes, for example. There are two types of diabetes: one that will always affect your rate no matter what and the other, which can change over time with effort.
Type 1 diabetes is usually diagnosed at a young age because the body isn’t making any insulin, which leads to a range of health deterioration problems. From adolescence through the entirety of adulthood, those with Type 1 must use insulin daily.
That’s not always the case for those who are diagnosed with Type 2 diabetes. More often than not, Type 2 diabetes is diagnosed later in life, usually middle-aged and older. Type 2 can be easily managed with the right diet and exercise.
Occasionally, those with Type 2 don’t have to take any insulin, but this requires a shift to a healthier lifestyle. Those who have to take medication or receive insulin will be charged more for life insurance than those without.
There are other medical conditions that can be managed and often minimize the risk of a higher insurance rate; however, your medical history can’t be overshadowed or diminished.
Complicated family medical history with such items as cancer or heart disease can easily hike up life insurance prices.
While all these things are important to pay attention to when shopping for life insurance, there are a few types of insurance that rarely require a medical exam — one of them being burial insurance.
Most of the time, a few health-related questions can greatly affect your rate — number one being whether you’re a smoker. Let’s move on to how high-risk habits affect your rates.
At this point you may be wondering, why does the insurance company need to know so much about your personal life? If you devalue your life by making unhealthy choices, the insurance companies will increase the premiums of your life insurance.
So the underwriting process, which is essentially an investigation into your life, allows the company to assess your risk level. That is, the higher the risk of you dying, the more you’ll pay to cover your life.
High-risk habits such as smoking or excessive drinking can cause insurers to increase their rates.
Smoking is the most common high-risk habit that almost every life insurance company evaluates, but it’s not the only one.
Do you have one or many instances on your driving record relating to speeding, reckless driving, or driving while under the influence of drugs or alcohol?
That’s right. Any past mistakes related to reckless behavior can come back to haunt your life insurance rates.
All the ways you go about having fun are also examined. Frequent risky adventures are going to be a red flag for insurance companies. To all the adrenaline junkies out there, know that a higher premium is a possibility.
Engaging in high-risk activities such as skydiving or racing cars can put you in danger of cutting your life short and life insurance companies aren’t thrilled at the thought of your early demise, just like those around you.
To avoid paying out life insurance claims early, some policies become void if death occurs via skydiving or any other listed exclusions.
So no matter what insurance company you go with, they’ll look into your life and charge you accordingly. It varies from company to company on how much weight is given to each factor. This is why getting quotes is so important when it comes to maximizing your policy and your dollar.
What you choose to do in your off time isn’t the only thing on display when the underwriting is in progress. Unfortunately, your work life can have just as much of an effect.
Insurance companies won’t hesitate to charge you more if your life is routinely in danger while on the clock.
Usually, we think of law enforcement or firefighting when we think of dangerous occupations. But in reality, there are thousands of jobs that insurance companies would scrutinize as dangerous.
For example, construction and transportation are two industries with extremely high numbers of fatal work injuries. So if you’re still thinking about becoming a pilot or a big city construction worker, make sure you buy life insurance beforehand.
Veteran or Active Duty Military
There are many benefits for the men and women who are willing to lay down their lives for their country. The U.S. Department of Veterans Affairs (VA) helps veterans and their families with health and life insurance as well as final expenses.
For those active in military service, there is a low-cost option called the Servicemembers’ Group Life Insurance where you’re automatically enrolled under the maximum coverage if you qualify. You may deny or change the coverage, but it’s available to all military members.
What happens when you’re no longer on active duty? Veterans who had an SGLI policy are eligible to switch to Veterans’ Group Life Insurance. A plus side to this is that no proof of good health is necessary.
There is, however, a maximum of $400,000 worth of coverage. Typically, that amount is more than enough, but some life insurance companies can offer up to $1 million.
Also, serving in the military means that there is less to worry about in terms of final expenses, and it’ll be free for you and your family to be buried in a national cemetery.
The VA’s office will pay a burial allowance to the deceased’s survivors to cover funeral expenses. Also, if burial occurs in a place besides a national cemetery, the VA will still cover the burial.
Shopping for Life Insurance
For many people, life insurance is this thing you know you should probably have but aren’t 100 percent sure on how much to get or even how to go about buying some.
Nothing is ever truly one size fits all, especially life insurance policies. Life insurance companies are all different from each other, too. So the first step you should take when shopping for life insurance is to do research.
You’re off to a good start just by being here and using this website.
If you’re ever in doubt or don’t understand something about life insurance in general, turning to the internet is a good start, but there are many insurance agents willing to help, as well. Never agree to a policy if anything is unclear to you.
People sometimes overlook many of the terms and parameters of life insurance. It’s not uncommon for complications to occur during claims due to an oversight.
If you’re looking for answers about your own policy or certain individualized situations, agents from most insurance companies are happy to help get you on the right track.
Now let’s begin with the various ways of how to go about purchasing life insurance
How to Buy Life Insurance
Life insurance is available to purchase online, over the phone, in person, or through an employer. Many top life insurance companies have descriptions of the various products and policies they offer.
No matter which way you decide to go about buying life insurance, it’s important to know the specifications of what you’re looking for in a policy.
Here is a video that will explain how to decide on what type of policy, whether it be a term or permanent policy, as well as how much coverage you will need.
Choosing which company to purchase your policy from is a crucial decision. The same way you compare products is how you should compare insurance companies to find the perfect match for you.
A great way to get a feel of a company is to research their ratings, company reviews, and customer feedback. It’s better to rely on outside sources because every company will try to talk themselves up — it would be crazy not to.
How much coverage do I need?
To be honest, there is no easy answer or chart for how much coverage everyone needs. It’s all a matter of being honest with yourself and your family as to what amount of money would be necessary if you were to pass.
The more dependents, debts, or loans you have, the higher your death benefit should be.
Both the short and long term need to be taken into consideration when calculating how large of a death benefit is necessary.
To start, add up the cost of living within your state for your family over the course of a year. Then multiply that by however many years you wish to support your loved ones.
If you have children, you would factor in until they were 18, out of college, or however long you wish to assist them.
There is also the matter of child care if you have young children. Would child care be an issue if you were to pass? You can easily find estimates for child care online to keep it as accurate as possible.
Don’t forget to toss in any outstanding debt, such as credit cards or car loans, as well as the amount of income that would be lost.
On a different note, burial and final expense insurance, which is typically bought by seniors, has a different short-term approach to it. Generally, the coverage is small — less than $50,000 — and only offered to those ages 55 and up.
There are many long-term items to consider when buying life insurance. A mortgage on a house takes around 30 years to pay off. That would be a big burden to be pushed onto your family if you pass before it’s paid off.
If you have young kids or you’re not finished with your education and are planning on going back, factoring in tuition and other college expenses is usually a long-term affair. Be sure to try and consider inflation when making your estimates.
Another item that should be taken into consideration is retirement. Not only do you want a policy that’s cheap enough to allow for retirement savings, but you should also consider a policy with long-term care or disability riders.
By adding those riders, you and your loved ones won’t have to worry about funding end-of-life care. This would also protect any retirement savings that are shared with a spouse.
At this point, you may be thinking: well, what is the damage going to be? $100 a month? $250 a month?
The answer is that it depends. Some people may spend over $200 a month for life insurance but some people will pay less than $20 a month. Let’s examine some sample rates from a few popular insurance companies.
Below is a table of sample monthly rates for a 35-year-old male non-smoker. The rates are for term life insurance plans with coverage of $100,000, $250,000, or $500,000 over 10-, 20-, or 30-year terms.
The rates are for five random insurance companies: AIG, Fidelity Life, Nationwide, State Farm, and USAA.
|35-Year-Old Male Non-Smoker||AIG||Fidelity||Nationwide||State Farm||USAA|
So a healthy, 35-year-old male can find a 10-year, $100,000 term policy for about $10 a month. That’s extremely manageable for almost everyone. Even if that same person wanted a large 30-year term policy, there is no reason he would need to pay over $40 a month for it.
Now, what about if that man was a smoker? Life insurance companies are quick to charge smokers way more money. Let’s see how big of a difference there is.
|35-Year-Old Male Smoker||AIG||Fidelity||Nationwide||State Farm||USAA|
Right away, you can see that for the smallest of policies a smoker of the same age and gender is paying about twice as much. For the largest of policies, smokers are paying three to four times the amount of their non-smoking counterparts.
Let’s switch gears a little bit and take a look at what kind of rates women can expect. This first table has rates for a 35-year-old female non-smoker.
|35-Year-Old Female Non-Smoker||AIG||Fidelity||Nationwide||State Farm||USAA|
We mentioned earlier that females, in general, pay less for life insurance than males do. By looking at these sample rates it’s easy to determine that that statement is true.
For a simple 10-year, $100,000 policy, women are paying less than $10 a month. As for the larger longer-term policies, non-smoking females are paying $5 to $10 less a month than their non-smoking male counterparts.
Finally, let’s take a look at some sample rates for a 35-year-old female smoker.
|35-Year-Old Female Smoker||AIG||Fidelity||Nationwide||State Farm||USAA|
The same pattern that was seen between smoking and non-smoking males can be observed between smoking and non-smoking females. For the smaller policies, smokers are paying about twice as much monthly.
As for the larger policies, smokers are looking at three to four times the amount a non-smoker pays.
Alternatives to Life Insurance
There are dozens of different reasons to save money. For most of us, the main goal is to have enough money saved to protect the family if something unexpected occurs.
Many times people turn to life insurance because death is unavoidable and life insurance is usually extremely beneficial.
But what if you don’t want to wait around for someone to die to use such a large investment?
Below are a couple of options on how to save money, as well as set it up to be easily accessible if death were to occur.
529 College Savings Plan
In short, a 529 plan is a tax-advantaged savings plan which encourages saving for future education costs. There are two types of 529 plans: prepaid tuition plans and education savings plans.
All 529 plans are sponsored by states, state agencies, or educational institutions. Every state sponsors at least one type of 529 plan.
Fees are an inescapable part of life; 529 plans are susceptible to fees regarding enrollment/application, annual maintenance, management, and distribution. Let’s look at a few ways to keep down the cost of fees.
The first step is to buy directly from the state whenever possible; this will avoid any excess broker-charged fees. To avoid paying more than necessary, certain conditions can be met for administrative fees to be waived.
Keeping a large account balance, participating in automatic contribution, or even just being a resident can help account holders pay less.
Now there is also the business of tax benefits.
Prepaid Tuition Plan
Prepaid tuition plans are based on a credit system to pay for tuition and fees. The account holder can purchase credits at participating colleges at current prices for tuition and fees.
There are a few restrictions and drawbacks presented by prepaid plans. For starters, the money put forth into these plans is unable to be used for room and board or tuition for elementary and secondary schools.
Due to most prepaid tuition plans being sponsored by the state, residency requirements are fairly common. The federal government also guarantees no prepaid plan. Some states provide a guarantee, while others do not.
That brings us to the biggest drawback of it all: inflexibility. The future is unpredictable, and prepaid plans don’t work with that uncertainty.
For example, let’s say that after purchasing credits through one college, your child decides that they want to go halfway across the country to a different college — a typical scenario that we have seen play out in movies and television.
Generally, those credits can’t be transferred out of state. In the rare cases that transfers do occur, a penalty fee is taken, which can still be seen as a waste of money.
Let’s take a look at how prepaid tuition plans fare against education savings plans.
Education Savings Plan
An education savings plan is an investment account that is for the beneficiary’s future qualified higher education expenses. Such expenses include room and board, mandatory fees, tuition, books, computers, and software when necessary.
Education savings plans allow for more flexibility than prepaid tuition plans. For example, withdrawals from an education savings account can be used at almost any college or university within the United States and some institutions outside of the country as well.
Another difference between the two types of 529 plans is that education savings plans can be used to pay tuition at an elementary or secondary school. Monetary restrictions can apply. A common example is a maximum of $10,000 per year per beneficiary.
There are a variety of investment portfolio options to choose from, and the most important thing to remember is that investments aren’t guaranteed. So take your time when sifting through your options.
Some principal-protected bank products may be insured by the FDIC, but every investment comes with risk.
A 401(k) is a retirement savings plan sponsored by an employer. How it works is that part of your paycheck — before taxes are taken out — is placed into an account, where it’s then invested in one of many mutual fund options.
The mutual funds are usually composed of a mixture of stocks, bonds, and money market investments. There is a lot of room given to manage and invest your money how you want.
When it comes to withdrawing money, there can be restrictions as to when and how much can be removed. There are contribution limits set and enforced by the IRS, but the IRS doesn’t tax the money until it’s withdrawn.
Health Savings Account
A Health Savings Account (HSA) is used to set money aside (pre-tax) to pay for qualified medical expenses. Such expenses include deductibles, copayments, and coinsurance.
The catch with health savings accounts is that you must have a high deductible health plan to contribute to an HSA. On the flip side, the funds are accessible at any time, and it may be able to lower overall health costs.
Joint accounts are another way to escape probate when someone dies. It’s standard for joint accounts to come with survivorship rights, which means if one account holder dies, the other automatically gets whatever is in the account.
For married couples and adult children taking care of their elderly parents, joint accounts are a great way to go; however, keep in mind that with joint accounts, both parties have equal access to the account.
Another option that’s very similar to a joint account is a payable-on-death (POD) account. These are regular bank accounts with a direct beneficiary designated. Again, such an option would avoid probate.
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The Bottom Line
Buying life insurance is the smart move for the majority of Americans and for all parents. Denying the fact of needing life insurance won’t stop death if it comes knocking, nor will it stop the bills from flowing after you’re gone.
This article has loaded you up with information about what type of life insurance would work best for, how much coverage you need, and where you can buy it. So, the only question left is: Are you ready to start protecting your family financially?
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