By Damon Poeter
Are you the kind of parent who hates loose ends? You certainly don’t like leaving things up to chance when it comes to your kids. You signed your daughter up for soccer camp the first day they took applications. You got your son extra tutoring when he fell a bit behind in math.
That relatively small stuff aside, it’s safe to say you’d want to have a plan in place if something happened to you or your partner.
You’re beginning to save, and perhaps you’re building equity in your home. Maybe your employer has a nice term life insurance policy you buy into each pay period.
You’ve got your bases covered – or do you?
What advantages, experiences and opportunities are most important for you to provide your kids? Share your Top 3 in the USAA Community forum.
Losing the person you expected to raise children with and grow old with is like no other kind of heartbreak. A surviving parent cycles through a maelstrom of emotions that can be incapacitating at times. For guardians taking over for single parents in a time of loss, the mix of grief and new responsibilities can be overwhelming.
One crucial way to provide support for those who might survive you is to make sure they and the kids can maintain a strong financial foundation.You’d want your family’s lifestyle to “move sideways and not downward”if you were to pass away, says Sean Scaturro, director of life and health insurance advice at USAA and a CERTIFIED FINANCIAL PLANNER™ practitioner.
Moving sideways means more than just having a home and food on the table, Scaturro says. If you weren’t around, you’d certainly want your partner – or your children’s designated guardian – to be able to treat the kids to the same kinds of vacations, holiday festivities, and birthday parties they enjoy today.
For younger families with less savings, more debt and small or nonexistent investment portfolios, life insurance can be one of the best options for ensuring financial health.
“Life insurance doesn’t make you happy and it isn’t supposed to make you rich, but it can make your family whole financially,” Scaturro says.
It’s smart to review your financial plans periodically, to ensure that your bases would be covered. Here are some things to consider when reviewing your family’s protection plan:
• Have your children’s needs changed significantly as they’ve grown older?
• How long would your savings last your family?
• Have you had a pay increase?
• Has your debt load increased?
“A good thing to do is to ask yourself two questions: ‘What do I want to happen if I died today?’ and ‘What would happen if I died today?’ If the answers to those two questions are different, you should start working to make them line up,” Scaturro says.
If your employer offers a term life insurance option, that’s great. A typical employer-backed life insurance plan pays for coverage amounts ranging from $25,000 to two years of your annual income. You might also have an option to pay out of pocket to increase coverage.
The amount of coverage that employers provide is called basic group life insurance.The amount of coverage you can opt to pay for yourself is called supplemental group life insurance.
As with an employer-matched 401(k) plan, you should absolutely sign up for an employer-provided life insurance group plan and try to max out your own level of contribution for supplemental coverage, Scaturro says.
But relying on employer-provided life insurance puts you at risk of having an insurance gap:
• If you leave your job, you might not be able to convert a work policy into a private policy
• If you switch jobs, your next employer might not offer a comparable plan
“You lose choice and control when you leave life insurance in your employer’s hands,” Scaturro says.
A good baseline for the amount of coverage to have under a life insurance policy is enough to pay off all outstanding debt, as well as a minimum of five years of your annual income.
Even if you’re part of a group life insurance plan at work, consider a personal policy:
• If the group plan wouldn’t pay out as much as you’d like in death benefits
• To avoid losing coverage if you change jobs
When opting for a personal policy, you’ll have to decide between a term life insurance plan and a whole, or permanent, life insurance plan. Term usually costs considerably less per month in premiums for younger policyholders than permanent. A term policy covers you for a set period of time, such as five, 10 or 25 years. Once that term is up, you’re no longer covered and you don’t get anything back.
A whole life policy typically costs more per month initially than a term policy, but it covers you for life– as long as the premiums are paid or the policy hasn’t been surrendered. Younger, healthier people often can lock in lower monthly premium ratesfor a whole life policy than they would if the policy were purchased later in life.
Whole life policies can also accrue cash value as premiums are paid, which the policyholder can borrow against and also use as a form of retirement savings.
Whatever you decide, it’s important to start making plans now for what would happen if your family lost a prime wage earner.
Sean Scaturro is a CERTIFIED FINANCIAL PLANNER™ practitioner and serves as USAA’s director of life and health insurance advice. He joined USAA in 2006 and has served members previously as a wealth manager and a practice management consultant. He has 15 years of financial services experience. Prior to joining USAA, Sean worked in commercial insurance, focusing on workers’ compensation, group health insurance and other financial services.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.
USAA means United Services Automobile Association and its affiliates. Financial advice provided by USAA Financial Advisors, Inc. (FAI), a registered broker-dealer, USAA Investment Management Company (IMCO), a registered broker-dealer and investment adviser, and for insurance, USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # OE36312). Investment products and services offered by IMCO and FAI. Life insurance and annuities provided by USAA Life Insurance Co., San Antonio, TX, and in NY by USAA Life Insurance Co of New York, Highland falls, NY. Other life and health insurance from select companies offered through USAA Life General Agency, Inc. (known in CA (license #0782231) and in NY as USAA Health and Life Insurance Agency). Banking products offered by USAA Federal Savings Bank and USAA Savings Bank, both FDIC insured. Trust services provided by USAA Federal Savings Bank.
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