San Antonio Express-News
September 9, 2003

Life Insurance for Young Families

copyright 2003, Paul Premack

Young parents have a variety of long-term obligations that can be very expensive to fulfill. A home mortgage is a major commitment. Raising children is also very expensive. If all goes well, the parents will be able to use their earning power to pay for those commitments. But part of estate planning is to examine the worst-case scenario and find workable solutions.

Their worst case is early death of one or both parents, leaving the surviving spouse or someone else to raise the child without assistance. Financially, early death means loss of the earning power of that spouse. Life insurance is the key component in the replacement of those lost earnings, and plays an important role in any family’s legal planning.

There are four major types of life insurance: whole, universal, variable and term life. Whole life has a savings component and usually stays consistent in cost and benefit. Universal life has a savings component, too, but allows costs to change if the savings component performs well (that is, if interest rates are high).

Variable life is much more investment oriented (since life insurance can grow free of income taxes) but can vary in cost and benefit depending on how the investments inside the policy perform. Finally, term life is pure insurance, without any savings component. It is less expensive while the insured is young, and the cost goes up as the insured’s risk increases with age. When you stop paying premiums, there is no further insurance.

The quality of the policy depends greatly on the quality of the insurance company itself. Ask the agent to tell you about the A.M. Best rating the insurance company has earned. Anyone who is going to give money to a company, with the expectation that years later the company will pay a benefit to the spouse or kids, should be concerned about the company’s financial stability.

Life insurance agents will make different recommendations regarding the amount of coverage that a young family needs. Factors to consider are loss of income, age of the children, possible cost of college, possible cost of support and health care, and eventually the cost of retirement.

In addition to insurance, all of us (of any age) need to consider planning for incapacity. If a person is injured or seriously ill, someone trustworthy should have legal authority to handle all the financial and medical issues that will arise. This risk can be covered by having Durable Powers of Attorney and Medical Powers of Attorney, and by selecting several reliable persons as alternative decision-makers. Parents with young children should also consider signing declarations of guardian for their children, in case both parents are incapacitated (but are still living, thus making the Wills non-applicable). This way, their obligations to each other and to their children can be met even in the worst of circumstances.