You’ve got your mortgage covered with term insurance. Your spouse is protected with a decent-sized life insurance policy, but what about your child?
Most people don’t consider just how much it costs to raise a child as a single parent.
If something happened to you or your spouse, suddenly, a 2-person job becomes a 1-person job. How would you manage?
When most people are adding up their life insurance needs, they don’t think about taking care of their child. It’s sad to think about, but it’s an important number to add up.
Leaving your children an inheritance is a great way to provide for their needs, pass along your assets, and to help them remember you.
Sometimes, however, the assets cannot be divided easily, and someone may get left out.
Enter life insurance.
How Much It Really Costs To Raise A Child
While specific dollar amounts vary, the national average for raising a child to his 18th birthday is $241,080 for a middle-income couple according to a new USDA report.
These costs don’t even include college though, so expect the amount to be much higher if you plan on helping your child get a good education.
Some families actually have to pay more to raise a child – families in the urban northeast pay about $446,000 to raise a child. However, some families pay less – rural Americans earning less than $61,590 annually pay about $143,000.
Regardless of where you live, though, it’s expensive. Those additional expenses translate into an additional need for life insurance.
There are a lot of factors which go into this number. First, you have childcare. You’re probably going to have to pay someone to watch your children or send them to an after-school program.
Either option won’t be cheap. Imagine if you have to pay for childcare for 10 years. That’s going to add up quick.
If you have more than one child, it’s going to be even more expensive.
Life insurance helps guarantee your kids will be provided for in the event of your passing.
How Much Insurance Should You Buy?
Knowing how much life insurance is needed can be tricky. While calculating fixed costs is rather easy, there are “soft” costs or variable costs that are rather difficult to quantify.
For example, what’s time worth with your child?
If you’re the surviving spouse, would you plan to cut back on your hours at work to spend more time with your child who now only has one parent?
This is something you would have to think about when buying life insurance. Other variable costs, like food, can be difficult to forecast.
Growing children eat a lot of food. But how much, exactly, is almost impossible to predict. Some days, your child may seem like a bottomless pit. Other days, they may eat what you think is a normal amount of food.
When you’re living on two incomes, it’s hard enough to plan out your grocery bill. When you’re relying on just one income, it becomes that much harder.
In general, what you need to do is add up all of the expected costs for the year that you believe you (or your spouse) would incur if your spouse (or you) were to die prematurely. Then, multiply this figure by the number of years until your child’s 18th birthday.
You can use the national average as a guide, but don’t get too fixated on the exact dollar amount. Remember, the USDA study publishes an average. Every family’s needs are different.
With that said, you should anticipate paying for several hundred thousand dollars in insurance coverage if you have a young child. If your own figures fall far short of the average, recheck your numbers to make sure you’re not forgetting anything.
If your figure comes in high, that’s probably fine. It’s always better to have a little more insurance than less.
What Kind Of Insurance Is Best?
There are several options of life insurance plans. Not all coverage is the same. The best type of insurance is the type that’s in force when you die.
The most important part is having coverage. We want you to make the best choice when it comes to buying coverage, but any protection is better than none at all.
When you’re shopping, there are a few factors you’ll need to consider.
If you have a family history of illness, however, or you think there’s a reasonable risk that you might be uninsurable in the future, it may be wise to purchase at least some permanent insurance like whole life or universal life.
Otherwise, term life works best for most families.
When we are advising our customers, we tell 99% of them to choose a term insurance plan. Buying term coverage gets you the most life insurance protection for the least amount of money.
Sure, term is going to expire at some point in the future, but who knows if you will still need life insurance then.
You will also need to decide where you will buy your policy. The company which sells the plan is going to make a major difference in how much you pay and any additional benefits you get.
Buy Life Insurance to Balance Inheritance
Life insurance can give you many options when it comes to balancing out the inheritance you intend to leave for your children.
If a sizable amount of your assets are tied up in real estate or in a business, for instance, then it may be very impractical and even unwise to divide it up to provide the inheritance.
An alternative is to see if one or more of your children is interested in the business or the property – particularly if it is a farm of some kind. If one of them is interested in continuing the business and running it, then you can give it to them when you die.
You will probably also need to leave enough additional cash for them to be able to pay for inheritance taxes. Then, buy a life insurance policy equal in value for each of your other children.
The Uniform Transfers to Minors Act (UTMA)
One way to help ensure your children receive your life insurance policy proceeds – as well as certain other assets such as stocks and mutual funds – is to set up an account under the Uniform Transfers to Minors Act, or UTMA.
In doing so, the account may be set up at a bank, life insurance company, or other financial institution whereby you name a custodian to control and manage the assets for your child (or children) until they reach adulthood.
At that time, the assets will then be turned over to your child or children who may then use the funds in any manner they see fit.
How to Designate Children of a Previous Marriage as Beneficiaries
If you have been divorced and remarried, or if your first spouse has passed away, you can use life insurance to ensure that the children of your first marriage receive their inheritance. This can be done two ways. First, you can enable your spouse to enjoy the benefits of your assets tax-free.
This could be very valuable if the spouse needs the assets to live on. Then, upon death they pass on to the children.
This can be accomplished with second-to-die life insurance. A second way is simply to buy life insurance directly for the children of the first marriage.
Then when you die, they receive the proceeds from the life insurance policy tax-free.
Put the Inheritance into a Trust
Estate planning trusts are often used by wealthy people to create tools that will preserve most to their wealth. There are many forms of trusts, and some of them will enable you to pass your wealth on to your heirs relatively intact.
The primary key to using trusts, however, is that the assets must be totally removed from your control.
The IRS says that if you have any control or ownership over the assets, or even over the life insurance policy, then it must go into your estate when you die, and estate taxes will need to be paid on it.
Another important aspect that you need to know in order to avoid inheritance taxes is that you must transfer your assets to a trust three years before you die. Also, you cannot have any say or control over the trust, and you cannot even pay the premiums for the policy, or even have the right to change the beneficiary.
Of course, no one knows when that will be so it makes it very important to make the transfer as soon as you can. Using the irrevocable life insurance trust (ILIT) is an excellent way to accomplish this. You will need an experienced estate planning attorney to set up the trust for you.
Advantages of a Trust
When you’re setting up a trust, it can get a little confusing. There are some benefits of using a trust versus just setting up a normal life insurance plan.
You have a lot more control over the money and when the beneficiaries receive the money. With a life insurance policy, the money is going to the beneficiaries when you pass away, end of story.
With trusts, you can determine exactly when and how your children get the money. For example, when you’re establishing a trust, you can set up certain requirements they will have to meet before they can get the cash.
Let’s say you don’t want your children to get the money until they graduate college. You can do this with a trust.
How to Set up a Trust
Unlike buying life insurance, setting up a trust for your children isn’t as simple. There are some serious factors and points you’ll need to ensure are airtight.
The vast majority of people who set up a trust use the help of a will & trust attorney. These are lawyers who specialize in crafting trusts. Using those experts can get expensive.
It’s very possible to draft one yourself (as long as your situation isn’t too complex) and then have it notarized. There are hundreds of videos and tutorials which shows you all of the info you need to include on your trust.
Create a Pot Trust
If you have young children, you could use life insurance to create a pot trust. This is a general trust out of which a trustee can withdraw funds as needed for your children.
This money will only be available, however, to be put under their control when the youngest one reaches 18. If the children are spread far apart in ages, this may not be a good tool to use.
Protect Your Children Financially
You want to provide for your family.
Sadly, you never know when something tragic could happen. If you have young kids, the idea of having to leave them is heartbreaking, but one of the few things you can do is give them money after your passing.
Securing your family’s financial future takes a lot of planning and foresight. You need to think about how much money they will need, when they need it, and how it should be delivered to them.
When setting up your estate planning documents, there are various options you can use to balance the amount of inheritance given to your children, or even to your grandchildren. Life insurance can provide for those needs, enabling you to pass on an inheritance that all your children will be glad to receive.
Buying life insurance can be pretty simple, especially if it’s term insurance. You don’t have to have a degree in finances to shop for life insurance. With some research, you can find a quality insurance company which sells a cheap plan.
Do you have enough protection for your kids? We are a group of agents with the goal of helping as many applicants as possible.
If you give us a call, you aren’t calling some massive call center. We will ask you questions about your needs and your situation. We don’t make blanket suggestions.
We are going dig into your needs and craft personalized suggestions and then collect quotes to match our findings.
Call us today for a quote at 1-888-552-6159.