NEW YORK (MainStreet) — When money gets tight, consumers tend to focus on immediate needs like housing, food and clothing, often pushing other vital issues to the back burner. Case in point: life insurance.
Nearly 70% of single parents with children in the home are going without life insurance, according to a new study by Genworth Financial, Inc., a financial services firm, and Gregory B. Fairchild, a business professor at the University of Virginia’s Darden School of Business. That’s significantly worse than the 45% of married parents who are uninsured, an alarming figure as well.
“We find that many single parents are simply too busy, or even too scared, to properly evaluate their life insurance needs,” Fairchild says in a report on the study. “This is an understandable fear because the first level of financial safety – the other parent – isn’t there.”
Clearly, many people who could afford life insurance procrastinate because the whole subject seems so confusing, with hard-to-understand options like whole life, universal life and so forth. In fact, consumers – married or single, with children or without – can easily find inexpensive coverage with a few simple steps.
Single parents, don't make this mistake: Start assessing your needs. Unless you are very well off, life insurance is essential if you have dependents, such as children. Most experts say each parent should have a policy with a death benefit that would pay five to 10 times the parent’s annual income. Fortunately, death benefits are tax exempt.
Irrespective of your income, the first step is to look at the cost to care for your children until they are grown. Figure the minimum costs of food, shelter, clothing and medical care, then add the costs of things like college, which are less essential because the child may be able to borrow or receive financial aid. Obviously, the younger the child, the higher the total cost will be.
Look at term policies. Many types of life insurance double as investments and provide coverage for life. These appeal to people who have non-working spouses requiring lifetime protection, but these options can be very complex and restrictive, and can carry high fees.
The alternative is “term life,” a simple, straightforward policy that, in exchange for an annual payment, will pay a set death benefit if you die within the specified term–such as 10 or 20 years. Term policies have no investment component – they work just like car or homeowner’s insurance, so they can be surprisingly affordable. A woman in her 30s might get a $500,000 policy for $1,000 a year, perhaps less.
Minimize costs. Insurance premiums depend on a number of factors such as your age, smoking history, weight and health. The younger you are, the cheaper the policy, since it’s less likely you will die during the term of coverage. Many of these factors are not in your control, but two key ones are:
The less coverage you get, the lower the premium. Although a $500,000 policy might be ideal, a $250,000 policy, or even a $100,000 policy would be a lot better than nothing. Because term policies can be cancelled at any time, you could scrap the policy and get a bigger one, or get another policy on top of the first, if your finances improve.
Secondly, premiums are cheaper if the term is shorter, since it’s less likely you’ll die during the specified term. If money is tight now, get a policy for 10 years instead of 20, and then get a new policy when your situation improves.
Shop around. Prices vary, so use the BankingMyWay insurance shopping tool to look for the best deal for you. You may get discounts if you buy various types of insurance – home, life and car – from the same company.
Read all the documents carefully, and don’t let a salesperson rush you. There are always plenty of low-priced policies out there, so there’s plenty of time to weigh your options.