No Load Life Insurance

Nearly 40% of single parents have no life insurance to protect their children.  Being a single parent is a difficult and exhausting task. Many are too busy to even consider getting insured or to evaluate their needs. For sole caregivers particularly, purchasing a life policy is a must. Unfortunately, financial planning for single parents with minor children can be particularly difficult. All documents and decisions must be synchronized to work together and must take account of all possibilities.
To help demystify life insurance for single parents, here’s some tips and advice:

1. What happens to my children if I have no life insurance?

Your children will be protected and looked after as long as you are alive. You will make sure of it.

What many single parents don’t foresee, or simply don’t want to address, is what happens if they pass away. Unless you have sufficient assets, not having life insurance means your minor children will end up with either:

• A family member or appointed guardian who will have to pay the whole cost of raising your children.
• A stranger who is willing to foster your children and bear that financial burden.

If your children are reaching adulthood, then having no life insurance may not be so damaging. However, you still need to consider college expenses. How will they afford to survive during college or even pay tuition fees?

2. I don’t have a will. Is having life insurance sufficient?

Whilst life insurance proceeds can provide funding for your children, you still need to deal with the rest of your property. Even if you don’t have any assets, you definitely need to appoint a guardian for your minor children. This can only be done in your will.

If you are separated or divorced, then the other parent will usually be appointed as guardian by the court, regardless of any contrary provisions in your will. However, this can vary from state to state and you should seek advices from an attorney in this regard.

If the child’s other parent is deceased, then the guardian will be the person appointed in your will.

If there is no appointment made in your will and no surviving parent, then someone with an interest in the children’s welfare may apply to the court to be appointed guardian. This may be a family member or even a friend. If nobody makes the application, the children will be fostered to a willing family. That is why you need a will, even if you have no assets and are relying on life insurance.

3. I have a will but no life insurance

If you have sufficient assets to cover your children’s living expenses until they become self sufficient, then it may be appropriate just to leave your assets and not purchase any life insurance. Realistically however, most single parents will not be in such a promising financial position.

Even if you are content with having only a will and no insurance, you need to consider that property left in a will is subject estate taxes and the will itself is also subject to contestability.

Estate Taxes and Debts

Estate taxes can be as high as 55% and your executor only has 9 months to pay them. Debts and credit cards also need to be paid from the estate assets. What if you have no liquid assets, only your home?

Your executor may be forced to sell the home just to pay for taxes and debts.

Life insurance proceeds can be used to pay for these liabilities leaving your home untouched and secure.

Contestability

In many states, your will can be contested by your dependents or if they are a minor, by their parent or legal guardian. This can be cause problems if you have children with different partners.

Picture this situation: you may be the only caregiver of one child if your other daughter or son is in the care of your former spouse. In this circumstance, as a prudent and concerned parent you may wish to leave most or even all your estate for the child of whom you are sole carer.

What you don’t anticipate is the parent of your other child, who is well looked after, contesting your will on their behalf. In this circumstance, the estate can be held up and dwindled away in a court battle with the executor.

At the hearing, a court may even order a portion of your estate to be distributed to your vulnerable child’s brother or sister, an unintended consequence. Life insurance proceeds would bypass the estate and therefore evade contestability.

4. Who should I name the life insurance beneficiary?

If you have adult children, you can name them to receive the funds directly if you wish.

Whether you have minor, teenage or adult children, you can always name a trustee to hold and apply the funds on behalf of your children in accordance with your wishes. This should be someone you have confidence in to make decisions in your child’s best interests.

You will need to set up a trust document for this purpose. You can stipulate when your children are to receive the funds directly (whether upon attaining the age of majority or any age you may stipulate). Once your children reach the stated age, the funds will be theirs to use as they wish. Until then, the proceeds must be managed by the trustee in accordance with the trust document.

You should never name your minor children as beneficiaries directly. This would cause tremendous problems. Firstly, the insurance company cannot pay out proceeds to minors. A guardian for the property of the children would need to be appointed by the court. Someone would need to apply for this. Secondly, once the death benefit is paid to the guardian, the money can only be applied in accordance with a management plan directed by the court. The court therefore decides how best to administer the funds for the children’s care.

If you wish to have your guardian control the proceeds, don’t name them on the policy absolutely, otherwise they can use the funds for personal benefits. You need to appoint them under a trust and name them beneficiary “as trustee” of the trust you set up.

5. If I have minor children, should I name my ESTATE as beneficiary of my life insurance policy?

The advantage of life insurance is that the policy is separate from the estate. If you name a specific beneficiary (other than the estate), the proceeds bypass the probate process and are not contestable. You have the peace of mind that the death benefit will go directly to your children or trustee you appoint for that purpose.

If you have children from different partners and you don’t trust your ex-spouse, avoid naming your estate as the beneficiary of any life insurance policy. Leaving the payout to your estate would enable it to be contested with other assets as part of your will.

6. When do single parents not need life insurance?

The circumstances where a parent is so well of they don’t actually need life insurance for their dependents is scarce. Here are some circumstances where having no life insurance policy may not have adverse effects:

• The other parent, a family member or a friend has agreed to support your child and to take on the inherent financial burden. However, children require a lot of financial investment and not many people are in a position to undertake such a responsibility. Even if they do agree to look after your children, are they willing to pay for college, a car or other opportunities you would wish for your children?
• Your children are employed, don’t wish to attend college and are self sufficient.

7. Their other parent has a policy, am I ok to have no life insurance?

If you are the sole caregiver now, you should consider this to be the case even when you die.

Unless you are the owner of your former spouse’s policy, he or she may change the beneficiary at any time, cancel the policy or simply stop paying the premiums. If you pass away, leaving your son or daughter in their care (whether willingly or not), you should not assume they will keep up their life insurance policy.

Even if you trust your ex-husband or ex-wife now, circumstances can change quickly. The massive and sudden parental responsibility may cause them to reconsider financial priorities, especially if you left no life insurance to assist.

Your ex finding another spouse or partner can also change the situation drastically, particularly if they have another child together. Simply, if you want your child to have sufficient funds on your demise, you need to have this arranged yourself.

8. Name one guardian and not a couple

If you are widowed, you definitely need to appoint a guardian for your minor children. This can be anyone such as your sister, brother, mother, father, cousin or even a close friend. Don’t appoint them as a couple unless you are content with the survivor of that couple looking after your child if something happens to the other person. For example, would you want your sister-in-law looking after your son or daughter if your brother died?

The best option is to appoint the specific person you wish to be guardian and then stipulate an alternative guardian if something happens to the first. For example, appointing your sister, but if anything shall happen to her, then your father.

9. Appointed guardians should not have life insurance proceeds.

Many problems arise when the same person looks after the children and has control of the funds. The line between their personal interest and that of the child’s can often become blurred.

Both tasks should be kept separate. You can appoint, say, your brother to be guardian and your sister to manage the life insurance proceeds and to appropriate them in accordance with your wishes. This keeps checks and balances in place.

10. Former spouse is paying child support, but has no life insurance

As a divorced single parent your former spouse may be required to pay child support. If your ex-spouse passes away, you will no longer have access to the agreed or directed child support payments.

You may wish to require him/her to obtain life insurance. The policy should be for the term he/she is required to make the payments. Make sure you are the owner and beneficiary of the policy to ensure he/she cannot change the recipients without your knowledge or consent.

Being a single parent is difficult on its own, without having to worry about life insurance. However, for your children’s sake you need be prepared and know they are protected.