Life Insurance: A Dependent's Safety Net And Financial Security

Life insurance is a tricky business. While it's not a necessity for everyone, it's important to consider your financial and life situation to determine if it's in your best interests and those of your family. One aspect of life insurance that is often overlooked is dependent life insurance. This type of insurance is an employee-sponsored benefit that provides a lump sum to an employee in the event of the death of their dependent, be it a spouse or child. While it's an underrated benefit, it can provide peace of mind and monetary assistance during a difficult time.

Peace of mind for the policyholder

Peace of mind is a significant advantage of dependent life insurance. It provides financial protection for end-of-life expenses, including funeral and burial costs, which can be extremely high. This type of insurance ensures that the policyholder can properly grieve the loss of their loved one without facing a financial crisis.

Dependent life insurance is particularly beneficial for those with young children, as it can cover the costs associated with the loss of a child, which can be devastating for a family. It can also be helpful for those with older parents as dependents, as it provides financial assistance in the event of their passing.

Additionally, dependent life insurance can help maintain the quality of life for the surviving spouse or partner. It can cover the costs of losing a non-income-earning spouse, including childcare, home upkeep, and other household contributions. This type of insurance gives the surviving spouse the chance to grieve and adjust to their new life circumstances without the added financial burden.

Furthermore, dependent life insurance can be convenient to manage, as it is often available through employers, and there is no need for a full medical exam. The application process is generally faster and more accessible.

Overall, dependent life insurance provides peace of mind and financial security for the policyholder, ensuring that they can focus on grieving and adjusting to life changes without the added stress of financial worries.

Coverage for funeral and burial costs

Funeral and burial costs can be a significant financial burden for loved ones. Burial insurance, also known as funeral or final expense insurance, is a type of life insurance policy designed to cover these end-of-life expenses. This includes the cost of funeral arrangements, such as viewing and service, as well as burial costs like interment, a burial plot, a casket, flowers, a funeral home service, a headstone, obituary notices, transportation, and an urn service.

The average cost of a funeral and burial in the United States is $7,848. If a vault is included, which is required by many cemeteries, this amount rises to $9,420. The average cost of a funeral and cremation is slightly lower, at $6,971. Burial insurance policies typically range from $5,000 to $40,000, which is often sufficient to cover these expenses.

Dependent life insurance, which covers non-income-earning dependents like spouses and children, is often used to ensure that funeral and burial costs are covered. This type of insurance is typically obtained through an employer's group benefit plan or added to an individual life insurance policy. While the cost of premiums for a child is usually inexpensive, it is generally higher for a spouse due to increased age and risk.

Dependent life insurance policies usually limit coverage to funeral and burial expenses. Most group dependent life policies offer coverage in thousand-dollar increments, such as $4,000, $6,000, or $8,000. There are often age limits for dependent coverage, with children typically covered only until they reach a certain age, such as 18 or 26. Spouses are usually defined broadly and can include common-law spouses, depending on state law.

In the case of military members, the Family Servicemembers' Group Life Insurance (FSGLI) program offers dependent life insurance for spouses and children under 18, who are full-time students, or permanently and totally disabled. The maximum coverage limit per child is $10,000, while the limit for a spouse is significantly higher at $100,000.

Overall, burial insurance and dependent life insurance can provide valuable financial protection for loved ones, ensuring that they do not bear the full burden of funeral and burial costs.

Coverage for non-income-earning spouses

Even if a spouse does not work outside the home, it is still worth considering life insurance for them. While many people buy life insurance to replace lost income, it is also intended to protect your family against financial hardship.

Value of a Stay-at-Home Parent

Stay-at-home spouses often take the lead in caring for young children, cooking, cleaning, and running errands. If the caregiver were to suddenly pass away, their working spouse would likely need to hire someone else to do these tasks, creating a significant financial burden. For example, according to Care.com, the average weekly rate for childcare with a nanny in 2021 was $694 for one child and $715 for two children.

Additionally, a stay-at-home spouse may be responsible for shopping for groceries, doing laundry, paying bills, driving children to activities, event planning, and helping with homework. According to salary.com, the work of a stay-at-home spouse in 2020-2021 was estimated to be equivalent to earning a salary of $184,000 per year.

Determining Coverage Amounts

When determining life insurance coverage amounts for a non-income-earning spouse, there are several factors to consider:

• Number of children in the family: Childcare costs will be proportional to the number of children.
• Lifestyle: Consider whether you live in a big city or the country, the size of your house, and whether you plan to send your children to private school or extracurricular activities.
• Future work plans: If you are currently staying at home with your children but plan to return to work in the future, this should be taken into account when calculating the amount of life insurance needed.
• Legacy for your family: You may want to leave an inheritance for your children or help with college costs.
• Final expenses: Life insurance can help alleviate the burden of paying for a funeral and related expenses.

Recommended Providers

MassMutual, Banner Life, and Transamerica offer the best life insurance for a non-working spouse, with rates starting at $45/month. MassMutual provides strong financial stability, Banner Life offers flexible terms, and Transamerica has customizable plans.

Coverage for children

Dependent life insurance offers a payment, known as a death benefit, if a covered child dies. It covers funeral expenses and the costs of losing a non-income-earning child.

Dependent life insurance is often provided by employers or through joint life insurance policies. It can be purchased as a standalone whole life policy for the child or as a rider to a parent or guardian's life insurance policy.

Whole Life Insurance for Children

Whole life insurance for children is a standalone policy that offers coverage for your child's entire life. When they pass away, you or another beneficiary they've designated in adulthood receives the policy's proceeds.

One of the primary benefits of child life insurance is that it locks in your child's insurability. This benefit is valuable if you have concerns about your child developing genetic conditions, such as diabetes, that would affect their ability to qualify for insurance later on.

Term Riders on Parent Policies

Another way to insure your children is through a child term rider. This rider is added to your insurance policy for an extra fee but is often more cost-effective than a standalone policy. It also provides coverage for all your children—both current and future.

Term life insurance riders for children are often convertible, meaning your child can convert the rider to a permanent life policy with a cash value component when they become adults. Like children's whole life insurance, this rider guarantees your child's ability to get insurance in the future.

Pros and Cons of Buying Life Insurance for a Child

The pros of buying life insurance for a child include:

• It provides a death benefit that can pay for a funeral or other expenses after death. This can also mean a grieving parent has the financial ability to take time off work if necessary.
• Life insurance secured during childhood can make maintaining coverage easier and more affordable when children reach adulthood. This is especially true for children who end up in a risky profession as adults.
• The cash value of a children's life insurance policy grows tax-deferred, meaning you won't pay taxes on gains until you withdraw them.

The cons of buying life insurance for a child include:

• Children are less likely to die young and necessitate a death benefit, therefore, your money may be better spent elsewhere.
• Coverage is typically low and may not meet your child's needs later in life.
• Cash benefits are often touted as a savings vehicle, but other investment types typically have higher interest rates.
• Long-term costs: Keeping a life insurance policy active for your child means paying decades' worth of premiums. If the policy becomes unaffordable, you may have to cancel it before your child can take over the premium payments.

Coverage for other adult dependents

While dependent life insurance typically covers children and spouses, other adult dependents may also be eligible for coverage. This includes domestic partners and elderly parents, though it is less common. To confirm eligibility, it is important to carefully read the terms of your insurance plan.

To qualify as a dependent, adult dependents typically need to meet specific criteria. They must live with the policyholder, be unmarried, and be directly financially dependent on or interdependent with the policyholder. In some cases, adult children who are mentally or physically disabled or full-time students may also be covered as dependents, provided that they meet certain conditions, such as being unmarried and claimed as a dependent on the policyholder's taxes.

It is worth noting that dependent life insurance for adult dependents may not duplicate coverage under the same group life insurance plan. For example, if a husband and wife work for the same company and the husband has group life insurance, he would not qualify for dependent life insurance as well.

Frequently asked questions