Life Insurance Planning for Parents

If you are a parent, you worry about your kids. It comes with the territory. You can't protect them from everything, but you want to make sure that they are happy and healthy. One of a parent's greatest fears is not being able to be there for their children. Parents can help alleviate these fears by making plans in case this does happen, such as writing a will and naming guardians for their children. Another way to do this is with life insurance policies, but what type of policy is best in this situation?

What Will the Policy Cover?

Most experts advise buying a plan that will pay out a certain number of years of income, such as five or 10 years. This is a simple formula to use, but there are other factors that parents may want to take into account. For example, one may be a stay-at-home parent, and that has value as well. If something happened to that person, the other parent might have to pay for child care and other domestic tasks. Another thing to consider is enough coverage to pay for children's college educations.

Modified Endowment Contract

There are a few cases in which a life insurance policy may cease to be considered as such for tax purposes by the federal government and will be considered a modified endowment contract instead. This happens when the amount paid in premiums exceeds a certain level. The idea behind MEC rules are to stop the plan from being used as a tax shelter. For those who have purchased it with the intent of their family making use of the death benefits, this is not an issue. It only becomes a problem for the person who hopes to use the funds for another purpose, such as emergencies or retirement.

Term Life Insurance

This type of plan covers a person for a certain amount of time, such as 10, 20 or 30 years. Parents who are primarily concerned about making sure their children are cared for may want this type because they can purchase it for a term that lasts until their children are adults. A person might consider other financial factors as well, such as when a home will be paid off. One advantage of this type is that it is generally cheaper than whole-of-life. It is also the easiest to understand.

Whole-of-Life Insurance

There are several different types of permanent plans, but whole-of-life is the simplest of those. The name tells you that unlike term, this is designed to last a person's lifetime. The other major difference from term is that it has a cash value. Furthermore, as this value grows, you are not required to pay tax on it. While not as cheap as term, whole-of-life has a fixed premium. This type of insurance can even pay dividends in some cases. This might not be the top choice for young parents who are struggling to make ends meet, but it can represent a smart investment for people who are more financially comfortable.