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Even Non-Traditional Families Need Traditional Life Insurance

What Does This Article Cover?
  • What types of life insurance work best for non-traditional families?
  • How can unmarried couples use life insurance to provide financial security?
  • How much life insurance does a single parent need?

Today's families come in all shapes and sizes. The traditional American family, exemplified by popular TV families such as the Cleavers in the early 1960s and the Huxtables in the 1980s, have made room for Charlie and Alan Harper, of Two and Half Men, two brothers, one divorced, who are raising the divorced brother's son.

Today there are literally dozens of new family configurations. The definition of family now includes, but is not limited to: step-parents, single parent households, adoptive parents, same sex marriages with and without kids, foster parents, and grandparents caring for children.

According to the latest census, the difference between 1970 and 2000 is startling. In 1970, married couples comprised 71 percent of all households. By the 2000 census that number had shrunk to 53 percent. An August 2004 article in online Financial Planning magazine states, "it's the traditional nuclear family that is the anomaly today…; only 24% of the 105 million U.S. households consist of married couples with kids."

When it comes to financial security, however, what hasn't changed is that even the most non-traditional families need that most traditional of financial products: Life Insurance.

Life insurance, both term and permanent, can cover a myriad of financial needs including:

  • Protection: Life insurance can provide your family with financial protection in the event of your premature death
  • Mortgage protection: Benefits can be used to help pay off mortgages and other outstanding debts in the event of a premature death.
  • Estate preservation: Insurance can provide funds to cover estate expenses and help avoid the need to sell assets and or borrow money to cover these expenses.
  • Charitable giving: An insurance policy can enable you to make a donation to your favorite charity upon your death.

Traditional Steps Everyone Should Take
No matter what form your family takes, there are a couple of steps everyone should take to ensure their intentions are fulfilled when it comes to providing financial security and peace of mind for others.

Draft a Will
Everyone needs a will. This is especially true for unmarried couples or single parents. A will enables individuals to express their desires for the distribution of their assets, as well as resolve any potential issues regarding guardianship of minor children. If a single person dies without a will, their estate will automatically pass to their next of kin through the probate process according to laws of their state. If there are minor children, judges will usually give great weight to the guardian-preference stated in the will.

Power of Attorney
With a this document, if an individual become ill or injured and unable to make decisions about their medical care, they can designate someone on their behalf to carry out their wishes, including the instructions in a living will. For those who are not married, this can be particularly important. Without one, the next of kin, whomever that may be, or even the doctor, will make those decisions for you. An unmarried partner, for example, probably will not have the legal ability to make those decisions for his/her partner. Non-traditional families often have other estate planning needs, such as domestic partner agreements, property ownership, and retirement plans, that need to be addressed.

Life Insurance & Unmarried Couples

Life insurance can fulfill a number potentially needs for unmarried couples. First and foremost it can be used to pass on assets while potentially maximizing estate tax savings. The proceeds can be used by the surviving partner to pay off a mortgage, or cover living expenses, or to pay potential estate taxes. They can also be used to help supplement the surviving partner's retirement and provide significant replacement income. Of course life insurance is important if there are minor children and there would be insufficient assets to care for them with out it.

Unmarried couples, however, may have difficulty proving an "insurable interest," that is, that the surviving partner would be hurt financially by the death of the other partner. A written domestic partner agreement can often satisfy this requirement. Many couples transfer ownership of the policy either directly to the intended beneficiary or transfer the policy(ies) to an irrevocable trust. Always check with an attorney, tax advisor, and estate planning professional to make sure the policies are structured properly.

Single parents

Single parents have a different set of concerns. If you are a single parent, life insurance is probably a necessity. Just how much you'll need will depend on how many children you have, your income, your current assets and other factors. According to a 2005 article on insurance.com, 6-8 times your annual salary is a good guideline for estimating how much insurance you will need. It may be a problem to name minor children as beneficiaries for your policies. A court will require a guardian be appointed and a single parent may want to establish a trust to receive the proceeds and then pass them on to the children. Single parents especially should make sure they have a will with the guardian for minor children specifically named.

Grandparents

In a growing number of families, grandparents are heading the household either by choice or necessity. Most grandparents were not planning on raising a second generation, with all the attendant expenses. To make sure they are prepared as possible now, and in the future, grandparents should review their wills and other important financial documents, such as life insurance, and retirement plans. Additional life insurance, for example, can be used to provide a grandchild's living expenses if the grandparents die prematurely or perhaps to fund a child's college education or help with the purchase of a first home.

Grandparents who want to consider naming their grandchildren as their beneficiaries on the insurance policies, retirement accounts and other financial assets are likely to face the same problem as single parents. As with single parents, grandparents may also want to consider establishing a trust for the proceeds of any life insurance policies.

A Variety of Life Insurance Products Available
A wide variety of life insurance products is available to help meet the needs of non-traditional families.

Term Life Insurance
Term life insurance is the most basic kind of life insurance. It provides affordable protection for a pre-defined period of time, so it is often used to serve temporary protection needs.

Term insurance is designed to help people purchase the protection they need when they can't afford to purchase all permanent insurance or when they only need coverage for a specific period of time. Term life insurance has a guaranteed death benefit but no cash value and the premiums will increase at pre-determined intervals such as 1 year, 5 years, 10 years.

It is also very often the product of choice when protection needs may be high for a period of time, then drop back, such as when your family is growing. Term insurance can also be an effective way to supplement permanent insurance during high-need years, such as when family and other financial responsibilities are outpacing income.

Permanent Life Insurance
Permanent life insurance – including whole life insurance and universal life insurance - is used when protection needs are more long term. There are many kinds of permanent life insurance, each of which has unique features that make it appropriate for certain situations.

  • Whole Life Insurance
  • Universal Life Insurance

The two main categories of permanent life insurance are Whole Life and Universal. Whole Life insurance products accumulate a guaranteed cash value.

Note: Increasing protection requires additional underwriting and there is a required minimum premium necessary to sustain your policy.

Survivorship Life Insurance
Survivorship life insurance is a life insurance policy that covers two individuals and provides a life insurance benefit after the death of the last surviving insured. Survivorship policies can be whole life or universal life insurance.

This material is being provided for informational purposes only. Neither New York Life nor its agents provide tax, legal or accounting advice. Please consult your own professionals for tax, legal and accounting advice.

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Even Non-Traditional Families Need Traditional Life Insurance

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