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Protecting Your Child's Financial Future

As a parent, your daily focus is on your child's immediate physical and emotional needs. But what if you, or your partner, were to die? Not a pleasant thought, of course, but think of the financial impact it would have on your family. Everything would change.

Life insurance can help you protect your family's financial wellbeing. It can provide income should you die and make sure that future goals—such as your child's education—are met.

What kind of insurance?

There are basically two kinds of life insurance: term and permanent (or whole life). Insurance companies have broadened their product offerings over the last three decades, but term and whole life policies still make up the bulk of insurance products sold. Here's how they differ.

Term Insurance

  • Term insurance provides protection for a specific period of time.
  • It pays a benefit only if you die during the term.
  • Most policies can be renewed when you reach the end of the term, anywhere from one to 30 years.
  • Initially, premiums are usually lower than for permanent insurance but increase at each renewal date.
  • It is often purchased to cover needs that expire with time, such as a mortgage.
  • Some policies require evidence of insurability at renewal.

Permanent Insurance

  • Permanent insurance provides lifelong protection.
  • It pays a benefit whenever you die, as long as the premiums are paid.
  • Price is based on a lifelong policy. Premiums are set at the beginning of the policy and generally remain constant over the life of the policy. It can be more expensive than term insurance if not kept long enough.
  • Most permanent insurance accrues cash value over the life of the policy, something most term insurance does not.
  • You may cancel your permanent insurance and receive the cash value in a lump sum.
  • The earlier in the life of the policy you "cash out," the less cash value there is.
  • Cash value may be used to continue paying premiums if, for some reason, you can no longer afford to do so.
  • With most insurance companies, you can borrow against the cash value of your insurance. Your loan is not dependent on credit checks or other restrictions. If you do not repay the loan and any interest accrued, that amount will be deducted from your policy's death benefit.
  • A rider can usually be added to a permanent policy that allows you to buy additional insurance without furnishing evidence of insurability.

There are two widely used insurance products that combine the features of both permanent and term insurance. When investigating insurance options, you will come across the following:

  • Universal or adjustable life—After your initial premium payment, you may pay premiums at any time, and in almost any amount, within certain preset minimums and maximums. There is also some additional flexibility in adjusting the amount of your death benefit.
  • Variable life*—This type of insurance tracks a portfolio of investments that in turn determines death benefits and cash values. You may allocate your premiums among a range of investment choices, each with its own degree of risk and reward. This type of insurance may not be sold without a prospectus.

*A variable life policy carries no guaranteed cash value. You bear that risk. If your investment choices do well, cash values and death benefits increase; if not, the reverse holds true. Some policies guarantee a minimum level of death benefits. This type of life insurance should be evaluated very carefully.

Workplace Options (WPO). (Revisado 2024). Proteger el futuro financiero de su hijo [Protecting your child's financial future]. Raleigh, NC: Autor.

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