Life insurance for single parents

Why single moms and dads need life insurance

Life insurance is one of those things that people don’t like to think about. However morbid it may seem, it’s even more important for single parents to consider life insurance than it is for a family with two parents. It can be a lifeline that your family may need if they suddenly find themselves without your support.

When a person dies, the life insurance policy pays out to the designated beneficiary. This could be the remaining parent or a guardian who will become responsible for the children. Often, a small monthly premium can provide a large payout. The life insurance benefit payment can then be used for any number of costs, including to cover the basic necessities of food, shelter and clothing or to replace the income and pay off any debt left behind by the deceased parent.

Types of life insurance for single parents

For single parents, it is important to weigh the cost of life insurance coverage against the benefits the policy can provide. There are several types of life insurance that may be good options for single parents. Term life insurance and permanent life insurance both offer perks that could make them appealing choices.

Term life insurance

Term life insurance is a form of life insurance that lasts for a set period of time, usually 10 to 30 years. This makes it a particularly appealing type of insurance for single moms and dads, who can purchase a policy that lasts until their children are grown and living on their own. If their child is an infant, for example, a 20- or 30-year policy may make sense. If you have teens at home, a policy lasting for ten years could be sufficient.

“I’m a big fan of term life insurance for single parents because it is relatively inexpensive,” says Michael Shea, a certified financial planner and advisor for Applied Capital. “If you’re young and healthy, you should have no problem getting a term policy to keep you insured until your kids are adults and not financially dependent on you.”

Because term life insurance is temporary, term policies are more affordable than permanent life policies. However, your term policy may come with a conversion rider that enables you to switch to a permanent policy should you need to. There may also be an option to renew the coverage year over year, but you typically pay a higher premium based on your new age.

There are several different kinds of term life insurance policies. Here’s what you should know about each:

• Level term life insurance: Level term life insurance maintains the same death benefit amount throughout the term of the policy.
• Decreasing term life insurance: Decreasing term life insurance is a low-cost option with a death benefit that decreases over time, as the name suggests. It may be a good option if you have a specific outstanding financial obligation — such as a mortgage that you're slowly paying down — that you don’t want your beneficiaries to become financially responsible for.
• Guaranteed renewable term insurance: This type of term life insurance policy still has an expiration date, but there is also the option of automatic renewal. However, note that renewal premiums do increase significantly depending on your age.
• Return of premium term insurance: With this type of insurance, if you outlive your term policy, you receive a refund of the premiums you paid. Although it is more expensive than other types of term insurance, it may be worth it if you prefer a guaranteed payout of sorts.

Although term life insurance may be a good option, there is another type of life insurance that you may want to consider: permanent life insurance.

Permanent life insurance

Permanent life insurance policies are designed to remain in effect for as long as you are alive, assuming you continue to pay the necessary premium. Permanent policies may build up cash value over time, which can be borrowed against or withdrawn in certain circumstances. However, because it lasts for your whole life, permanent life insurance is typically more expensive than term life insurance.

There are two main types of permanent life insurance, although each type also has subtypes:

• Whole life insurance: Whole life insurance is a relatively simple type of life insurance. The policy features fixed premiums that won't change over time and is designed to last your entire life (maximum coverage ages range from 95 to 121 years old). Whole life policies typically earn cash value at a set interest rate. They may also be eligible for dividends. 
• Universal life insurance: Universal life insurance provides a level of flexibility when it comes to your life insurance. You may have the option to adjust your death benefit or premium amount. Universal life also accumulates cash value, although the interest rate may vary depending on the market.

“For single parents, an overfunded fixed index universal life insurance policy might be a good idea,” suggests Mark Charnet, founder & CEO of American Prosperity Group. “These policies are available from many top-rated insurance companies and are savings options that have the potential to earn a rate of return on par with the stock market without risk of principal loss and can grow tax-deferred while providing the parent with a tax-free income in retirement. This policy can also be used for a child’s education and will not count against their request for financial aid eligibility. This program works best when college expenses are at least 12 to 15 years down the road, but can still perform well in a less desirable scenario.”

Sam Price, owner and broker at Assurance Financial Solutions, adds the following about choosing between permanent and term life insurance: “For single-parent households, permanent life insurance can be a great tool so long as there is sufficient income to make it worthwhile. If parents are on a budget and are struggling to make ends meet, term life insurance is always going to be more suitable. But if income isn’t a question, then permanent life insurance can be a great addition to the financial plan.”

Before you decide which type of life insurance policy to buy, you may want to consider your financial goals and how you want your life insurance to function. Talking to a licensed insurance agent or a financial planner may be helpful.

Group life insurance

One way to supplement your own personal life insurance policy if you are in the workforce is to find out if your company offers group life insurance. This is a common perk, especially in larger companies, and may be available either free of charge or relatively cheap. Group life insurance is often available without a medical exam, making it a particularly good choice if you have health issues.

There are a few caveats to group life insurance however. One is that it is likely to end if you leave your employer. The other challenge with group policies is that there is often little opportunity to customize the policy to meet your needs.

In addition, the death benefit for group policies is usually on the low side, which means they are likely not sufficient alone to meet the financial needs of your beneficiaries. For that reason, it's best used as a supplement to other policies rather than as your only source of life insurance coverage.

How much life insurance do you need as a single parent?

Choosing the right amount of life insurance can be difficult. You want to purchase enough to provide for your children until they become financially independent, but knowing exactly how much it will cost to care for them over the next five, 10, 15 or more years is tricky. Buy too little, and their guardian may struggle to afford necessities, but buying too much means paying larger premiums than necessary.

Debt

One of the first things to consider is your debt. Your children won’t inherit your debts unless they’re adults who co-signed on it. However, your creditors can seize your property for unpaid balances. If you want to pass assets like your home to your children, you’ll need enough insurance to pay off outstanding debts, such as a mortgage or a business loan. If you have debt that your child is likely to inherit, consider that amount and how long it will take to pay it off when determining how much coverage you need.

Income

Consider your income and how much of it is used to pay for your child's needs. One common rule of thumb states that you should have enough life insurance to cover ten times your annual income — but this number doesn't always hold up in all situations. Ask yourself how much of your income needs to be replaced if you die so that your children's guardian will not be financially burdened.

Future expenses

Then, think about future expenses your children might incur. This includes everyday things like groceries and shelter, as well as possible education expenses, such as college tuition. To come up with a number, you could estimate how much you spend on each child per year and multiply that by the number of years until they reach an age where they can fend for themselves. Add that to the amount it would take to pay off your debts and any other major expenses you wish to cover (like college).

Alternatively, you might want to review your situation with a life insurance agent before making a choice. At that point, you can start thinking about who to name as the beneficiary.

End-of-life expenses

Another factor to take into account is end-of-life expenses. These might range from medical costs for a final illness to the costs of a funeral and interment. The average cost of a funeral in the U.S. is roughly $8,300. Would your heirs be able to pay this out-of-pocket? If not, that amount could be added to the death benefit for your life insurance, or you could consider purchasing a small burial insurance policy.

Budget

Possibly the most important factor when purchasing life insurance for single parents is how much insurance you can comfortably afford to purchase. You may wish to buy a policy that will allow your children to go forward after your death with no financial concerns, but if you cannot afford the monthly premium payments, it will do you little good. Be realistic in considering how much you can afford to spend on your policy. If your finances improve in the future, you can consider increasing your coverage to higher levels.

How to choose beneficiaries

When you purchase a life insurance policy, you will choose a beneficiary who will receive the policy payout if you pass away. There are several options for beneficiaries. You could leave the money to:

• Your children: Appointing your children as beneficiaries may seem like the obvious choice, but it could be risky. Life insurance companies are generally unable to make payments to minors. In this case, you would appoint a legal custodian, perhaps one of your children’s grandparents, to be responsible for the death benefit until your children are of legal age.
• A caretaker: If your children are young, you may want to leave the money to their appointed caretaker. You should discuss this option with your insurance company and with the person you intend to designate a beneficiary to make sure everyone involved understands the agreement.
• A trust: An attorney can help you establish a trust for your children. A trust is simply a legal vehicle that allows you to choose a person — called the trustee — to control the assets within the trust. You can name a responsible adult to serve as your trustee and can format the trust so that your children will have access to the money held within it when they reach a certain age. When creating a trust, make sure that you discuss it thoroughly with your chosen trustee, so they know what your wishes are for the money if something should happen to you.

If you’re unsure of the best strategy for beneficiary designation, a licensed life insurance agent or certified financial planner can help advise you.

Frequently asked questions