Supporting Extended Family? You Might Need More Insurance
November 22, 2021
Most people think of life insurance as a way to ensure that their spouse and children will be taken care of if they die. But millions of people around the world help support others outside their immediate nuclear family—for example, aging parents, or extended family members in their own country or perhaps their country of origin. Worldwide, 38% of all people live in multigenerational households. And in a Pew Research survey, more than a quarter (26%) of Americans said they’ve provided financial assistance—whether regular or occasional—for day-to-day expenses to someone outside their immediate households. If you’re a breadwinner in a situation like this, providing some security for your extended family in the event of your death is probably a must.
Fortunately, the death benefit on your life insurance policy can be used to help support anyone who depends on you. Ahead, some tips for tailoring your policy to your needs.
Choose the right amount of coverage.
This is the first step: Make sure your policy has a sufficient death benefit to let you support the people you want to support should something happen to you. “You wouldn’t underinsure your home or your car,” says Michael Kojonen, founder and owner of Principal Preservation Services. “Well, you shouldn’t underinsure yourself, either.”
Basically, explains Kojonen, the proceeds that your life insurance policy pays out upon your death must be large enough to meet your dependents’ needs for as long as they need it. Consider purchasing enough insurance so that your extended family dependents will be able to live off the interest earned from investing your death benefit proceeds.
The common rule of thumb is to buy coverage in an amount equal to five to ten times your annual income. This may suffice if you are supporting, say, your aging parents. If your situation is more complicated (say you’re supporting multiple family members), coming up with the amount of insurance you need to purchase can be less straightforward. But there are many online life insurance coverage calculators that can help you arrive at the right amount of overall coverage to purchase. You may also consult an insurance specialist for guidance.
Decide which type of insurance to buy.
With either term insurance (which lasts for a set period of years before expiring) or permanent life insurance (which does not have a set period of years), you can purchase a death benefit to help meet your needs. Which type of policy should you choose? One of the factors that may determine your choice is how long your period of support for each dependent will last. For instance, if you’re supporting an elderly parent whose life expectancy is less than 20 more years, a term life policy with at least a 20-year term could suffice. These policies are generally more affordable than permanent life policies and would see you through the period of your greatest need for it.
But let’s say you need the life insurance policy because you want to provide lifelong support for children in your extended family who are likely to outlive you by many years. In that case, a permanent life insurance policy, whether universal life or whole life, might be worth considering.
Upon purchasing a life insurance policy, you will be asked to assign a beneficiary to receive the death benefit proceeds in the event of your death.
You can usually name as many beneficiaries as you like to receive the proceeds, and you can decide the percentages allotted to each beneficiary. It’s a good idea to revisit your beneficiary designations on a regular basis because family dynamics and needs may change.
Your beneficiary also doesn’t have to be a person or persons. For example, you could designate a trust or a business partner as your beneficiary, and that party would be the one that manages the way the funds are disbursed to your extended family members—not all of whom may be in a position to receive or to manage the money directly—after your death. If you’re interested in designating a trust for your family, you first need to set up the trust for the family members to whom you want to leave a legacy. An estate planning attorney can help you create a trust document that explains how the assets will be divided and managed. A trust is a great idea if you want to protect a family member who will need continuing special care in your absence.
Your legacy, your wishes.
Naturally, you’d like nothing more than to make sure that your chosen beneficiaries get taken care of if something should happen to you. But you may feel you don’t have a lot of control over the situation. In fact, this goal is easier to achieve than you may realize. With a bit of thought and preparation, you can use life insurance to help secure this ongoing financial support for the people who depend on you. “Most of us will always have a reason to provide a legacy benefit to those we love and support,” Kojonen says.
Millions of people around the world help support others outside their immediate nuclear family—for example, aging parents, or extended family members in their own country or perhaps their country of origin
Satisficing doesn’t mean going with the easiest option or just saying ‘whatever.’ It’s is all about deciding what constitutes “good enough."
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