This is an important question for single parents with young kids. Suppose you had a $100,000 term life policy and you died when your kids were still under the age of 18. Do you know what would happen to that $100,000?
A secondary beneficiary
If you’re single and your children are under age, your life insurance underwriter will ask you to name a second beneficiary. The reason for this is that in most states children under the age of 18 cannot be the beneficiaries of a life insurance policy. This means that if they were underage, they cannot get the money until they reach the age of 18. And it may not be a good idea to just name a secondary beneficiary because that person would then have control of the funds and you would have no control of what they might do with them.
In some states, you may be able to name a financial guardian. This is a person who must manage the money from your life insurance until your children reach the age of 18. If you do not name someone as your financial guardian, the court will appoint one for you.
Guardian and trustee
The best solution is to pick a guardian and trustee of your estate. For example, if you have a lawyer you might name that person as trustee. You could then name someone else to be guardian. You would set up a trust, which would stipulate how the money from your insurance could be used until your kids reach the age of majority. How this works varies a lot from state to state so it’s important to do your research before you set up that trust or choose someone to be a guardian.
The cost of term life insurance
If you will be buying insurance to help safeguard your children, you will need to choose between term life and whole life. In general, term life would be better for a single parent with small children. It’s a way to get maximum coverage for the minimum amount of money. For example, if you were 35 years old and in relatively good health, you could probably get a $250,000 10-year level term life policy for about $108 a year (national average) and a 30-year policy for $228 a year.
Whole life policies
The major difference between whole life and term life insurance is that whole life policies usually build cash values. In comparison, term insurance is like renting coverage – it never builds any cash value. The cash value you accumulate with a whole life policy is tax-deferred.
Borrow from yourself
One good advantage of a whole life policy is that once it accumulates cash value, you can borrow from it. You can take your time paying back the money or not pay it back at all since you’re loaning money to yourself. If you do borrow the money, the loan will accrue interest. If you die before you pay back any outstanding loans and interest, this will reduce your death benefit and your estate or heirs will get less money. For example, if you were to borrow $5000 and your death benefit would have been $100,000, your heirs would get $95,000 or less (depending on the interest that had accrued).