As a parent, one of your most important goals is building a secure future for your children—and that includes protecting them from financial uncertainty. Understanding life insurance as parents is an important step in creating a solid financial plan. There’s no better way to ensure that your child will always be cared for—even after you’ve passed away—than by purchasing term life insurance.
Families need to plan out what strategies they can use to mitigate risks to their financial survival. Unlike a business, a family unit does not have succession planning, so thoughtful financial planning is essential.
Your family’s financial roadmap should include a course of action for:
- Unexpected death of a loved one,
- Disability or inability to work,
- Extended care needs due to illness,
- Guardianship planning for your minor children, and
- Medical power of attorney designations.
Many families face a challenging juggling act: paying for existing fixed costs (e.g.: household expenses and a mortgage) and saving for future expenditures that may vary over time (e.g.: college tuition or funds to support a comfortable retirement).
Your estimates of your family’s future variable expenses may prove inaccurate in years down the road, so create a financial buffer—or extra savings—to accommodate changes in the cost of living, inflation, and taxes. Finding those extra savings means developing a budget that is flexible, but also well-balanced—one that doesn’t encourage oversaving or overspending.
» Calculate: Life insurance needs calculator
Why Life Insurance for Parents Is the Foundation of a Solid Financial Plan
One way to make managing this balance easier is to let your financial goals dictate how much you spend, save, and invest.
This, of course, is easier said than done.
It’s far too easy to lose track of those extra household expenditures and small impulse buys—especially when you have children. When it comes to savings, it’s often tempting (and sometimes necessary) to withdraw from funds earmarked for a rainy day, for example, to pay for a needed big ticket item (repairing the family car) or to cover an emergency that would otherwise put a strain on the household budget.
There’s one fixed cost that shouldn’t be eliminated even when other cost-cutting measures are in full force: life insurance. For parents, one constant throughout their family’s life will be the need to protect children from financial vulnerability—and that means having the right term life policy.
How Life Insurance for Parents Supports a Goals-Focused Financial Plan
A goal-focused financial plan is a strategy that puts your family’s fiscal goals in perspective for the long haul. It helps you figure out which objectives are realistic (reasonable risk) and shows you when to reexamine your game plan. Life insurance for parents ensures that the pursuit of long-term financial goals won’t be derailed by the unexpected—laying the groundwork for a solid, goals-oriented financial roadmap.
The right term life insurance policy will provide excellent coverage at an affordable rate—allowing you to devote more of your funds to savings, investment, or building a business without worrying about your family’s financial health, if you would pass away unexpectedly.
How Term Life Insurance Works
The death of a breadwinner (or stay-at-home parent) is devastating emotionally, spiritually, and financially.
There are affordable term life insurance policies that can mitigate financial stress after the sudden death of a loved one.
The standard recommendation is owning at least 10 times your family’s breadwinner’s gross income plus enough to pay off the mortgage. If you have credit card debt, add this to your life insurance needs calculation.
In the case of a stay-at-home parent, we recommend a minimum term life insurance policy of $300,000 to $500,000. It’s going to take at least $40,000 to $50,000 a year to replace all the responsibilities that you are in charge of when it comes to the home and child care. As you know, a stay-at-home mom (or dad) may not bring home an actual paycheck, but there’s a lot of economic value to everything you do.
You work hard and what you do is extremely important; your day-to-day responsibilities would likely need to be replaced via full-time child care or other help in the home.
Whether you are the sole breadwinner, one half of a joint-income couple, or a stay-at-home-parent, a term life insurance death benefit (the funds that your beneficiaries will receive upon your passing) can do much more than add a temporary boost to family finances and pay for funeral and burial expenses.
A typical period of coverage for a term life policy may be 5, 10, 15, 20, 25, or 30 years (terms available may vary by insurer and your age at the time of buying your policy). The amount of coverage for which you may be approved by your insurer’s underwriters will depend on your life insurance company, your age, gender, health and medical history, among other factors.
How a Death Benefit Works
Depending on the amount of coverage that you purchase, your policy’s payout may help to:
- Reduce the burden of paying for funeral and burial services;
- Provide years of support for your spouse, partner, and/or children;
- Cover debts such credit card debt, a mortgage, or student loans;
- Pay college tuition for a child;
- Provide support for elderly, disabled, or loved ones with special needs;
- Help a loved one buy a first home;
- Add funds to a trust fund for a grandchild;
- Handle legal fees connected with the management of an estate; or
- Provide an endowment to a favorite charity.
These are just a few ways that a death benefit may be used.
Even a term life insurance policy that does not have a very large face value is still beneficial for your family as any contribution to your end-of-life expenses, no matter how small, will help defray costs for your family at a difficult time.
Term life is the most affordable life insurance for parents and the vast majority of families will be able to afford some coverage.
» Compare: Term life insurance quotes
There may also be a point in time when you realize that you may need more coverage or when you may decide that you will need less coverage than you currently have after your term expires. Policy laddering is an option that some families incorporate into their financial plans to make sure they have the right amount of coverage as their needs change.
For example, perhaps you purchased a 15-year term life insurance policy at the birth of your daughter. You may decide a few years later to purchase an additional 10-year plan when you learn that she plans to go to medical school after college. That way she’d be covered and supported throughout medical school, ensuring that she would be launched into life, even if you were to unexpectedly die while she is in school.
3 Areas of Financial Planning That Young Families Often Overlook
Creating a financial roadmap means planning for the good (or not so good) times that your family may face, helping your loved ones in any situation. Your family likely relies on you a great deal, so it’s important to make sure nothing is left out.
There are a few situations that even the most prepared of us tend to overlook:
Knowing How to Cover Extended Care
What’s your extended care plan? Is it a long-term care insurance contract, self-funding through savings, or to have your spouse and children look after you with their own funds?
As we age, we need to think about planning for a future in which we may not be able to take care of ourselves any longer. If we don’t have a plan in place for our extended care needs, it can devastate a family financially and emotionally.
A head of household often works hard for 30 to 50 years, raises their children, and finally gets to retirement. If an event happens, such as a prolonged illness or cognitive impairment, a long-term care contract helps safeguard the legacy you’ve built and protects your family from the high cost of caring for you over an extended period of time.
» Learn more: How to Live Longer and Financially Plan for It
Determining How Children Will Be Looked After if Both Parents Die
Every family should think through how assets should be distributed at the time of death to minor children (under age 18).
Talk with your partner and discuss if your children could handle inheriting a large lump sum of money from life insurance, a pension plan, personal savings, or another source at age 18. It’s amazing how siblings can vary. Some children in your family may be able to do it and others wouldn’t know how to cope with it.
While we were writing this blog, we (as coworkers) discussed how some of our own beloved siblings could blow an inheritance at any age if they were to receive one, big lump sum. So, while we would hope that everyone gets a good financial education from their parents at a young age and into their teens, not everyone does. And, even those who do, have siblings where money just seems to flow through their hands like water.
One solution would be to put the money in a trust to manage assets for your child until they are mature enough to take on financial responsibilities themselves.
This all can be done with a will.
The same thought process could be applied to a spouse as well (if needed). If you have a $1,000,000 term life insurance policy, does your spouse know how to manage the $1M to make it last for the next 10 to 35 years, if its purpose was to maintain their existing lifestyle?
This is where the advice from a financial professional (CPA or financial advisor) can be very beneficial in helping families craft a plan to manage the assets if one or both parents were to die unexpectedly.
Naming a Guardian for Your Children
Households with young children also need to think about who the guardian is going to be for minor children should both parents no longer be around.
That’s an important discussion for parents to have, regardless of what your life insurance plan is.
If you haven’t named a guardian and a child is suddenly left alone, whether a single parent or both parents die at the same time (e.g.: due to a car crash), it would be up to the child protection court to determine who will become the guardian for the child. The person who is appointed by the government might not be the ideal person due to reasons that legal counsel cannot be aware of. So, take care of this yourself as soon as you are aware that you will be having a child. Estate planning is critical for parents with children.
Setting Up a Medical Power of Attorney
Our children are always part of the family, even once grown.
With the age of marriage rising over the past decades into the late 20s, having a durable power of medical appointment allows those with adult children to talk with medical doctors and receive information, should something tragic happen to our child that puts them in a hospital.
Without the appointment, the parents may have to go to court and argue for that right, adding another layer of stress on top of already stressful and tragic situation.
These are events a family needs to think about and plan for, no matter how difficult it may be. No one is completely invincible (no matter how old or young) and not planning for them will make the situation even worse.
If you are single (or recently divorced), the same situation applies to you. Get a medical power of attorney document on file at your local hospital that names your sibling or another person whom you trust. It will give you and your extended family peace of mind.
How a Term Life Policy Can Match Your Financial Goals
Life insurance for parents works in tandem with your larger financial strategy to enable smart financial choices. Here’s how one family might use term life insurance as a vehicle to help them reach their goals:
Goal 1: Preserve the estate intact for the next generation
John has a $2 million policy on himself and another on his wife. This policy is enough to cover their mortgage, his student loans, create a college fund for their two young children, end-of-life expenses, and replace the loss of income that their family would experience should he pass away.
This accomplishes his first goal—leaving as much of the estate as possible to his family.
Goal 2: Continue wealth-building even if one parent cannot work
Life insurance for parents also protects families when unforeseen events, other than death, disrupt family life and potentially derail financial planning.
Because John works in construction—considered by many life insurance companies to be a high-risk occupation—his financial planner recommends that he purchases an add-on to his term life policy (called a rider).
A disability income rider provides protection from the total loss of income should the insurer become unable to return to work. This type of rider waives premium payments and offers a supplementary income, paid each month and based on the face value of the policy. This is because a sudden loss of income, combined with the extra out-of-pocket expenses that may occur when a breadwinner is disabled, may have a serious impact on family finances.
Since we mentioned riders, here are just a few of the other options that can be added to life insurance policies for parents:
- Long-Term Care Rider: Money is deducted from the death benefit to pay for care if the insured becomes critically ill.
- Critical Illness Rider: Provides a lump sum payment that may be used cover the insured’s medical expenses and other costs.
- Child Rider: Provides coverage in the tragic event of a death of a child, helping to defray costs for the bereaved family.
Goal 3: Create financial security that lasts a lifetime
John’s family’s term life insurance helps to bring them closer to their financial goals by:
Limiting the risks of investments negatively impacting the family’s financial well-being. If you invest in the financial markets, the value of your investment may vary with economic changes. If you were to pass away, your family may need to sell stocks to help cover expenses. If your investment’s value has not grown, or has decreased, then they may need to pull funds from their savings to remain in the black.
Protecting the retirement funds for a spouse or partner. Upon your passing, your family will need to pay for end-of-life expenses, legal fees, debts, and replace any loss of income.
If savings are not sufficient, then your spouse may have to use all or part of their retirement fund for take up the slack. This may also cause an increase of family debt. The retirement fund may have to be replenished by borrowing—perhaps through a second mortgage—causing further financial strain on family assets.
Securing adult children’s financial future. Life insurance for parents is really quality of life insurance for children. If a parent or both parents were to pass away, then end-of-life expenses, debts, and any estate costs may place a burden on family income or savings. This may result in the use of a part, or even all, of a college fund to cover expenses. Without adequate financial support, college-aged children may need to take out loans in order to finish their studies.
If there is a surviving parent, then older adult children may need to pitch in financially to replace the loss of income or to cover outstanding debts. If the parent ends up needing help over a significant period, this may result in the adult children having less money available to put toward saving for retirement, buying a home, or sending their own children to college.
These are just a few reasons why life insurance for parents is a necessity for a sound financial roadmap. Now, let’s look at how to work out your coverage requirements.
How to Estimate Your Insurance Needs
When deciding on how much life insurance you will need, ask yourself these questions:
What debts do I need to pay?
- Do I have debts, in addition to my mortgage, that are not dischargeable after death (such as private student loans)?
- Have I personally guaranteed loans for my business or for friends and family?
What kind of support do I hope to provide for my children throughout their lives?
- Was I planning to help or pay for college?
- Help them buy a first house?
- Do I plan to leave funds for my grandchildren?
- Does my child have special needs for which they will need care throughout their lives? If so, who will care for them and how will they be compensated?
How will my spouse or partner be supported after I’m gone?
- Are there enough funds for retirement?
- Are there enough funds for several years of childcare costs, or will my spouse or partner have to change their work schedule to care for our children?
- Is our health insurance coverage sufficient to cover our family’s needs as medical costs may rise—and if not do we have extra savings to make up the difference?
Having enough coverage is critical for both parents—regardless if they are stay-at-home moms (or dads) or in the workforce. A stay-at-home parent still contributes to family finances by removing the cost of childcare, housekeeping, and other duties that would normally have to be paid for.
Life insurance for parents is a must for single moms and dads as well. Whether the other parent is involved only financially, is actively co-parenting, or not in the picture at all, the custodial parent needs just as much coverage (and often more) than spouses in a two-parent household.
As a parent, one of your most important goals is making sure that your family is insulated from any financial vulnerability—now and in the future. Life insurance for parents provides you with peace of mind and tangible benefits for your family that will last if you aren’t around as long as you’d like to be.
Get started with our term life insurance buyer’s guide, where you’ll learn how to get free life insurance quotes online, select an insurance carrier, and complete your application in under five minutes.
» Calculate: Life insurance needs calculator
About the writer
Natasha Cornelius, CLU
Senior Editor and Life Insurance Expert
Natasha Cornelius, CLU, is a writer, editor, and life insurance researcher for Quotacy.com where her goal is to make life insurance more transparent and easier to understand. She has been in the life insurance industry since 2010 and has been writing about life insurance since 2014. Natasha earned her Chartered Life Underwriter designation in 2022. She is also co-host of Quotacy’s YouTube series. Connect with her on LinkedIn.