Firstly, congratulations on your new arrival – there is nothing more wonderful than welcoming a new bundle of joy into the world. There are so many firsts to look forward to – the first smile, the first laugh, the first word, the first steps…there is so much that your new baby will do that will amaze, entertain and sometimes frustrate you over the years.
When preparing for the arrival of a new baby, you probably bought a pram, a cot and a car seat, then once the baby arrived you started buying tiny clothes and nappies. The costs suddenly start to build and this is when a lot of new parents start thinking about what would happen to their tiny dependant if they were no longer around. After all, babies and children are expensive. They are always outgrowing their clothes, then they don’t get funded hours at preschool or nursery until the term after they turn three and even then, there are out of school clubs, activities, events and birthday parties to pay for.
There are many life insurance options for parents available but essentially the main decision that you need to make is whether you just want a policy for life insurance with children as beneficiaries or whether you want your children covered too with a life insurance for children policy.
Life Insurance With Children As Beneficiaries
The most common life insurance policy taken out by new parents is a life insurance policy where their child or children would receive the payout from the insurance company in the event of their parents’ deaths.
The intent of this policy is that the parents would be insured for a value determined based on several factors – their age, the length of the policy, the size of the payout required (usually determined by a calculation relating to the joint annual salary multiplied by the number of years until the youngest child reaches the age of 18) – and they would pay a monthly fee for this policy until such time as it was no longer required or until the worst happened and the policy needed to pay out.
You should be aware, however, that although you can name children of any age as the beneficiaries for a life insurance policy, they cannot legally receive the payout should they be under the age of 18 when their parents pass away. For this reason, it is worth always nominating a guardian who would be able to receive and use the funds for the childrens’ benefit until such time that they reach adulthood and are able to have the funds transferred to them.
Life Insurance For Children
Despite the slightly misleading title, there are actually no life insurance policies specifically for your child. What this actually means is that you can take out an add-on to your own life insurance policy which is known as children’s critical illness cover. This is a type of life insurance which pays out should your child be diagnosed with a serious illness or condition or die during the cover term.
Most of these policies pay out up to £25,000 in the event of a diagnosis or death and although medical bills aren’t specifically covered by the policy, you can use the money from the policy payout to fund private medical treatment or in the worst case scenario, funeral fees.
If you have a family history of childhood illnesses requiring considerable medical intervention, then you may consider that adding your child to your life insurance policy would be beneficial but because this is a fairly rare occurrence, it’s important that you read the small print on each policy carefully to ensure that you will be getting the right amount of cover and that the particular medical conditions that you are concerned about are covered by the policy. Some policies also have age limits for children to be covered by their parents’ policy before they have to be provided with their own life insurance policy which is generally either a term policy (e.g. 5 or 10 years) or a whole of life policy.
If, however, you just want to know that your child or children will be cared for and financially stable should anything happen to you, then it is worth considering a life insurance policy with your children as beneficiaries or a policy in trust instead so that your children would receive the financial payout from your insurance policy when they are old enough (usually over 18 years old).
How Much Life Insurance Should A Single Parent Have
The main reasons why a single parent would take out a life insurance policy are:
The child is being raised by only one parent
One parent has a group life insurance policy through their employment so only the other parent needs their own policy
Despite being a two-parent family, only one parent is working and able to pay the policy premiums
Before considering how much life insurance a single parent should have, it is important to understand which category of “single parent” they fall into as a true single parent raising a child or children alone will need a larger payout for their children should they die during the insurance term than a family where the policy only covers one parent but another would succeed them and be able to financially and physically care for any dependents left behind.
In order to determine the amount required from a life insurance policy, it is important to consider the financial value of the individual to be covered and to remember that someone who does not bring in a salary also has a significant financial value as the things that they do for free would need to be paid for if they were no longer around.
There are several ways of calculating financial value but the simplest is to multiply your salary (or the cost of hiring someone to do the work that you do for free) by the number of years until the youngest child turns 18).
There are several variables to this – for example, if the child or children are being raised by only one parent, then a larger financial value may be required to pay off a mortgage to guarantee the children a safe home to grow up in or to enable a nominated guardian to give up work to take care of the children. Equally, if the parents were older and had considerable savings, then a policy payout would not need to be as high as there is a greater likelihood that the surviving parent would be able to afford to care for the child or children by themselves, even if they had to reduce their working hours to do so.
If you have any debts, in particular debts that are co-signed for, then they should be accounted for when determining the value of the payout required to ensure that you wouldn’t be leaving your family with unaffordable or unexpected debts to manage in your absence.
Once you have decided how much money you need a life insurance policy to pay out in the event of your death, then it is time to consider what type of policy will best suit your individual circumstances.
Types Of Life Insurance Policies For Parents
Although any type of life insurance will allow you to nominate your children as dependants, there are a few which are ideally suited to families and these are discussed in more detail below.
Single person life insurance is exactly as the name suggests – it is a life insurance policy which covers only one nominated person, which makes it ideal for single parent families or for families where one partner already has a dedicated life insurance policy and the second parent wants one too. The payout amount required would be greater for a true single parent than for a parent in a partnership only wanting to replace their income or benefit to the family (e.g. a stay at home parent has a significant financial value as should they not be around, children would still need to be cared for and ferried about whilst the working partner was unavailable and housework, shopping, and other critical unpaid work would need to be funded in order to maintain the standards that the family is used to).
For a couple where only one parent is taking out an insurance policy, the best option is a joint life insurance policy which covers both parents but pays out after the death of the first parent and then ceases. This can be an affordable choice and would provide peace of mind that the remaining partner and children would be financially supported after the death of one of the parents. The remaining partner could then choose to take out a single person life insurance policy if the children were still minors and if they deemed it to be necessary.
Another option would be to take out a Family Income Benefit policy which is designed to provide your dependants with a fixed monthly income for the remainder of the term of your policy term should you pass away during it. It is similar to a term life insurance policy but pays out a monthly income rather than a lump sum.
The final decision is to consider whether a fixed term policy, a decreasing term policy or a whole of life policy will be most appropriate for your family:
– A fixed term policy would only apply for a particular term (for example, until your youngest child turns 18) and then cease to exist, even if it had not been used.
– A decreasing term policy can be a more affordable option as the payout decreases over time, either in line with a reducing mortgage or on the assumption that children will require a lower level of financial support as they age.
– A whole of life policy is a policy that will only expire when the policyholder dies. This is the most expensive type of life insurance policy but it is helpful for families who require the guarantee of a payout in the event of the policyholder’s death, for example, if the policyholder’s partner or children have additional needs meaning that they will be entirely reliant on the policyholder’s income even after they are gone.
Whichever policy you choose, it is clear that having a life insurance policy is a wise move if you have children aa, whilst no money in the world can ever make up for the loss of a parent, it can allow their children to continue to live in their family home in the manner to which they have become accustomed and ensure that a surviving parent or a nominated guardian will not be under unmanageable financial stress at an already distressing time.
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