There isn’t anything you wouldn’t do for your kids in this life. You’d do everything in your power to give them the very best life possible, even if that meant moving mountains. But protecting your children’s futures doesn’t require you to lift national monuments — just smart financial planning decisions, including choosing the right life insurance policy.
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That’s because with the right life insurance, you know that even if something happens to you, your family will not falter financially without your income. You can rest assured that your children’s education will be covered, and they can focus on healing and growing instead of being burdened by lingering debt or expenses they can no longer afford.
But finding that life insurance isn’t always easy — it can feel overwhelming to deal with all the details, terms and options available when shopping around, especially when your choices will impact your children for decades to come. Fortunately, there are a few core questions that should be on every parent’s checklist.
1. Which Kind of Policy Meets My Needs?
All life insurance is not created equal. Term insurance is pretty much exactly what it sounds like, covering you for a set term (think 10, 20 or even 30 years). Generally, it comes with lower premiums, making it a good fit for many families who want coverage during their prime working years.
Conversely, whole life insurance is also true to its name, covering the policyholder for life. It’s generally more expensive than term, but that’s because it comes with a guaranteed death benefit and a built-in savings component known as cash value. This cash value grows over time, tax-deferred, and can be borrowed against or withdrawn under certain conditions. This added financial flexibility makes it appealing for long-term planning, especially for high-income households or those focused on estate planning.
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2. How Much Will the Policy Need To Cover?
To truly determine which kind of insurance will meet your family’s goals and needs, you’d be wise to consult with a financial planner or licensed insurance expert.
One of the most common mistakes many well-meaning parents make is assuming that they only need coverage equal to several years’ worth of salary. In truth, you’ll need significantly more than that: determine how many years of income your family would need to maintain their current lifestyle. Factor in whether your surviving partner works and how long they might need financial support, as well as how much time it will take for your youngest child to become financially independent.
You’ll also want to consider any outstanding debt you’d want to pay off, such as your mortgage, car loans, credit card debt and even student loans. Don’t forget to plan for future expenses like education (are you thinking public or private schools? In-state or out-of-state college?), childcare or daycare, and healthcare costs — especially if your passing would disrupt your family’s health insurance coverage.
3. How Can I Set Insurance Up To Create Generational Wealth?
Purchasing the right life insurance is about more than just covering your bases when you’re not there. It can also be about giving your children — and even your children’s children — every opportunity to flourish.
Life insurance death benefits are generally income tax-free for beneficiaries, providing instant liquidity. That can prevent your family from having to sell property, including a family home or family business, just to cover expenses. In essence, you’re freeing your kids to build their own wealth instead of scrambling to pay off your debts.
There are also ways you can build generational wealth with life insurance while you’re still alive. Permanent policies such as whole life or universal life insurance build cash value over time. You can borrow against that cash value for emergencies, retirement or other investments, giving you access to funds that can help you grow wealth during your lifetime while still preserving a benefit for your heirs.
Bottom Line
When you’re shopping for life insurance, you hold your children’s futures in your hand. To decide which plan is right for your family, work with a qualified advisor. Ask yourself what your true financial needs are, how much coverage you’ll need, and how you can structure your policy to support your loved ones no matter what life brings. The best policy for your family is the one that gives you confidence today — and security for tomorrow.
Looking to build a legacy? Check out our Life to Legacy guide for expert advice and smart moves you can make today.
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This article originally appeared on GOBankingRates.com: Parents: Don’t Buy Life Insurance Without Asking These 3 Questions First
