There are several reasons why a family might want to review their life insurance coverage when starting a 529 college savings plan, such as providing peace of mind and protecting family finances from unforeseen events. Your term life insurance policy should have sufficient coverage to fund the amount of future college expenses you plan to pay for.
What is term life insurance?
The primary purpose of a life insurance policy, such as a term life insurance policy, is to provide income replacement in case a wage-earner dies. Term life insurance is purchased to cover a set period of time, generally 10, 15 or 20 years. The policy owner determines the amount of coverage needed to insure their family during that time.
Unlike a whole life policy, term life insurance has no cash value. It simply provides coverage for your family if you die during the selected time period. The death benefit, or payout, never changes and does not have an investment component. Premiums for term life policies are typically lower than premiums for whole life policies, and they remain the same throughout the term.
How much life insurance do you need?
When choosing a term policy, you’ll want to consider every expense your family would be responsible for paying for in your absence. This could include mortgage payments, childcare, costs of caring for aging parents and future college costs, as well as monthly bills and your funeral expenses.
Most people choose a term that provides coverage until the children graduate from college. Some people choose to have coverage through normal retirement age.
The face value of the policy should generally be five to 10 times current income, depending on the age of the insured and the term of the life insurance policy. This should be sufficient to cover the cost of an annuity that replaces the lost income.
When to consider increasing your coverage
Typically, families obtain or increase a term life insurance policy at major life-cycle events, such as when a wage-earner gets married or has children. Before then, there is no spouse or children who are dependent on the wage-earner’s income. Often, starting a 529 plan is a reminder that the parents may need to obtain or increase their life insurance coverage.
Some families further increase the face value of the policy to provide enough money to fully fund their children’s 529 college savings plans and to pay off the mortgage on the family home. This provides the insured with peace of mind, knowing that their family will be taken care of in the event of their passing.
If a family does not have life insurance coverage, it places the 529 plan funds at risk. If the surviving spouse encounters financial difficulty, they may be forced to take a non-qualified distribution from the 529 plan to pay their bills. Even if the surviving parent does not have to use the 529 plan funds to pay for everyday expenses, their financial situation may force them to limit or eliminate future contributions to the 529 plan.
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