A parent’s greatest fear is passing away before their children have grown into adults who are capable of caring for themselves. It’s a heartbreaking thing to even think about, let alone plan for. As a result, many don’t. But the reality is that when we fail to plan, we place our children in a particularly vulnerable position that has the potential to derail their futures.
The process of purchasing life insurance can feel overwhelming and convoluted, but once you begin to grasp the foundational concepts, you realize that it’s actually quite simple. There are two primary types of life insurance policies: term life insurance and permanent life insurance.
Term coverage vs. permanent coverage
The defining characteristics of term life insurance policies are that they are temporary and that you can get a large amount of coverage at an affordable rate. Term policies can cover the insured person for 10, 20 or even 30 years, or anything in between. If the insured person dies during the term, the beneficiary will receive a payout. If the insured person is still alive at the end of the term, the policy pays nothing, but the insured will have the option to renew at a higher rate.
“Term life insurance policies are best understood when they’re compared to renting an apartment,” said New York-based financial specialist Pam Rogers. “You pay a premium for coverage that extends over a certain period of time. Then, at the end of the term, you have the option to renew your ‘lease’ or policy, but it will likely be for a higher rate.”
Permanent life insurance policies, however, can be slightly more costly in comparison to term life. They last for the entire life of the insured person. Whether the insured lives for the next year or the next 100 years, the beneficiary will receive a payout when the insured person passes away.
“Permanent life insurance policies are best understood when compared to buying a house and paying a mortgage,” adds Rogers. “When you buy a house, it’s a permanent situation. As long as you pay your premium, the policy is yours for life.”
Additionally, permanent life insurance policies generate cash value over time. This allows policyholders to borrow cash against the policy; however, if the loan is not repaid, the loan amount will be deducted from the death benefit payout.
Why parents need both types of coverage
Parents should approach purchasing life insurance as though they are setting up a financial safety net for their family. How will your family sustain itself in the event of your or your partner’s death? The first line of defense would be term life. Term life policies can be purchased to cover a timeframe that spans the years of raising children. Additionally, term life policies are ideal for covering the repayment of debt such as mortgage and student loans. They are also ideal for covering or off-setting the cost of college in the event of a parent’s death.
“If you have a 30-year mortgage, student loans, credit cards and then suddenly, you’re removed from the family, you have to think about how the family will continue to live in your absence,” said Rogers.
The second part of the safety net parents should put in place for their families is the permanent life policy. These policies are ideal because once you’re approved, they provide guaranteed coverage for life. Often times, health complications have a tendency to pop up as we age and some ailments make getting coverage virtually impossible or unaffordable.
“Permanent life insurance policies are helpful because if you happen to outlive the term, you will still have a permanent policy to cover your final expenses,” Rogers added.
Most people struggle with the idea of their mortality, which is why life insurance is a touchy subject for so many. But when you’re a parent, it’s a conversation you can’t afford to avoid.