Nasdaq’s recent article entitled “Having a Child? Now Is the Time to Get Life Insurance” explains that parents usually want to make certain that their children are provided for -- even in a worst-case scenario where that parent doesn't survive until the child's adulthood. That is the big reason why it is so important to get life insurance when a child is born, if the parent doesn't have it already.
Parents must make sure they are as financially prepared as possible if they die suddenly, and purchasing term life insurance is frequently the best way to do that. A term life insurance policy is one in effect for a limited period of time, like 20 years. Parents can buy a policy that will cover their life for as long as they expect their child to be dependent on them for financial support.
Parents who get term life insurance can be sure there’s money available to provide for a child into adulthood, as well as to cover that child's education.
Term life insurance can be a cheaper way to obtain this type of protection than whole life insurance and is usually all that is necessary. This is because children eventually become financially independent after several decades. However, parents whose children are disabled and who will require lifelong care may wish to buy a whole life policy, so a death benefit will always be paid out.
When purchasing term life insurance to protect a child, parents should consider who to name as the beneficiary. Typically, naming the child directly can create some legal complications because children under the age of 18 cannot legally manage the life insurance proceeds -- and giving a large lump sum of money to a child who’s just 18 could create problems with wise money management.
It may be wise for the parent purchasing coverage to name the other parent of the child as the beneficiary of the death benefit. That parent can use the money to provide financial support. However, in instances where the person purchasing coverage doesn't necessarily trust the other parent to use it wisely, there are other approaches such as creating a trust, appointing a trustee to manage the funds on behalf of the child and naming the trust as the beneficiary.
Parents should speak with an experienced estate planning attorney, if they have a more complex situation.
By: Edward J. Welch, Esq. ||| Estate Planning | Wills | Trusts | Asset Protection
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Reference: Nasdaq (Dec. 12, 2021) “Having a Child? Now Is the Time to Get Life Insurance”