Making sure your kids are taken care of doesn’t just mean making them breakfast, getting them dressed, and dropping them off at school on time. For parents, life insurance and a will are crucial aspects when you want to ensure your family is taken care of should anything happen to you.
As a parent, your family is depending on you for financial security. While it’s recommended that you consult with a professional before purchasing life insurance or creating a will, we’ve put together the essential info you need to know to help get you started in securing your family’s future.
THE BASICS OF LIFE INSURANCE
Life insurance ensures that a sum of money is paid out on the death of the person insured, providing parents with peace of mind knowing their families will receive financial aid in the event of their passing. Life insurance is especially important for parents, who need to ask themselves a tough question: Could my family handle debt, mortgage, and childcare on top of basic financial needs without me or my partner?
“Parents should consider not only their mortgage balance and debt owed,” suggests Lucy Solomon, insurance/financial advisor at The Co-operators, “but also replacing their income to cover future financial needs.”
When should you get life insurance? The sooner, the better, according to Solomon. Since it’s based on age, gender, smoker status, and health, it’s easier and cheaper to get life insurance the younger and healthier you are.
There are two types of life insurance: term and permanent. The type right for you will depend of your budget, says Solomon.
Term Life Insurance
Term life insurance is cheaper, simpler, and better for temporary needs. With term, you pay a monthly premium to get coverage for a set period of time.
“It has the lowest initial costs,” says Solomon, “but premiums increase at each renewal.” So if you have a twenty-year policy, the monthly premium you pay is locked in for the whole length of the policy. But if you wish to purchase a new term policy at the end of that term, the premiums will increase, especially since you’re now twenty years older and your health might have changed.
A few insurance companies have a conversion option, allowing you to convert your term insurance to permanent insurance before age 70 regardless of health.
“This is a very important feature,” says Solomon, “as later on in life parents might want to convert all or a part of their term policy to permanent life insurance to leave money for their children, cover taxes, etc.”
Young families with larger mortgages, young children, and tight budgets will need a large policy at an affordable price. For this, Solomon recommends term life insurance.
“Go with the longest term possible, so you don’t have to worry about a premium increase for a long time,” she suggests.
Permanent Life Insurance
Permanent life insurance is better for – you guessed it – permanent needs. It is more complex and comprehensive. It covers you for life, but the premiums are much steeper. However, the premium is fixed no matter what happens to your health as you age, and it can’t be cancelled for medical reasons.
And permanent life insurance is not just insurance; it’s also an investment vehicle. Part of what you pay goes to the insurance company, and part is invested in a savings-type account that accumulates over time.
For families with a bigger budget, this type of life insurance might be better suited. To learn more and for help determining which type of life insurance is right for your family, check out The Co-Operator’s online tool.
Solomon has one final tip for parents when getting life insurance: “Make sure that the company you are applying with underwrites the policy at time of APPLICATION and not at death,” she says.
This will make sure that the benefit is paid to the beneficiaries within days and without questions.
*For more financial options and help, check out our Financial Services for Families in Toronto directory.
THE BASICS OF WILLS
A will is a legal document in which a person states how their assets are to be distributed after their death, like who will inherit their bank accounts, jewelry, cars, and real estate.
“While it is important for everyone to have a will regardless of their stage in life,” says Jessica Feldman, senior associate at Bales Beall LLP, “it is critical that parents of minor children have a will.”
A will doesn’t just name beneficiaries and determine how you will distribute your property once you’re gone; it also identifies a guardian (in the event that children are left without a parent) and an executor (who manages the estate).
Here’s a break down of the important items covered in a will:
A will determines who will receive assets and how each beneficiary will share in the estate. If you want to give a specific gift to a relative or friend, or if you want to give a certain amount of money to a charity, this would be noted in your will.
Without a will, the province has a set formula for dividing up an estate. Children under 18 are minors, so they can’t directly receive the funds, and their surviving parent or guardian can’t receive the funds on their behalf. Instead, the funds are paid to the court, where they are held until the children turn 18.
“Most parents do not want their children gaining access to funds at the age of 18,” explains Feldman, and many parents prefer to leave everything they have to their surviving spouse.
Parents usually state in their will at what age they would like their children to have access to their share of the estate.
“Many of my clients prefer the approach of holding funds in trust until an age beyond 18 and paying out the capital in a tiered distribution. For example, holding the child’s share until age 35 and paying out a third at 25, a third at 30, and the final third at 35,” says Feldman.
That way, if the child is not responsible and spends most of the money at 25, the parents have peace of mind knowing there are more funds in trust for when the child has learned how to manage it more responsibly.
For these same reasons, life insurance and RRSPs should not be designated to minors.
“Especially for life insurance,” Feldman advises, “which can be a significant amount of capital to receive at such a young age.”
A will can name a temporary guardian of children under 18 in the event that both parents have died. While choosing a guardian for your children is an important decision, don’t spend too much time dwelling on it.
“Most young parents I meet get hung up on the issue of guardianship, which stalls the process of finalizing the will,” says Feldman. “I would encourage parents to give this thought but to not let this hold them back from getting the will signed.”
In Ontario, since the temporary guardian named in the will must still apply to the court to be the permanent guardian, there is the opportunity for other family members to apply, if the previously named guardian is no longer the proper person at that time. And remember – a will is not set in stone and can be altered.
The executor named in a will is the person responsible for administering the estate. For parents, this will be the person who manages their child’s money. Feldman suggests this should be a different person than the guardian; the guardian will be spending the money, so they shouldn’t also be managing it.
Before creating a will, Feldman suggests seeking proper legal advice: “Do-it-yourself kits, although tempting because of the price, can cause lengthy and costly litigation down the road.”
For a parent, both a will and life insurance are especially important for family security. They can be costly, but think of creating a will and purchasing life insurance as an investment in your children’s future.
READ MORE LIKE THIS:
- 8 Helpful Tips for Teaching Kids About Money
- Parenting Isn’t Easy: How a Parenting Coach Can Help
- Essential Toronto Resources for New Parents
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