The Financial Mistake One-Third of Parents Make

More than a third of parents with kids younger than 18 years old don’t have life insurance — an oversight that money experts say put your family in “serious financial jeopardy.” (Photo: Getty Images/Yahoo) 

What will happen to your kids if you die isn’t an easy topic to confront. Perhaps that fear factor is one reason why a shocking number of parents are simply avoiding the issue altogether and haven’t gotten any life insurance.

According to a new survey from Bankrate.com, 37 percent of parents with kids younger than 18 years old don’t have any coverage providing for their loved ones if they die. And even the moms and dads who have life insurance often don’t have enough to address their family’s basic needs when they’re gone, according to the June survey of 1,000 adults in the U.S. Thirty-two percent have no more than $100,000 in coverage, Bankrate reports, noting that such a payout doesn’t go far if there’s a mortgage to pay and college tuition to consider.

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“Without life insurance, you’re putting your spouse and your family in serious financial jeopardy,” financial expert Rachel Cruze tells Yahoo Parenting. “If something were to happen to you or your spouse, your family needs to be able to replace your income so they can pay the bills and put food on the table. There is so much pain and heartache that comes with the loss of a loved one,” she adds, “the last thing you want your family to worry about in the event of a death is money.” Cruze’s father, money guru Dave Ramsey, agrees, adding that the bottom line is simple. “When you die without having a current will and estate plan,” he tells Yahoo Parenting, “you leave a huge mess for your family.”

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With all the things that parents are already paying for, Ask the Money Coach founder Lynnette Khalfani-Cox gets why life insurance can be de-prioritized for financial reasons. “You have to settle your mortgage or rent, utility bills, car payment, and food, so the immediate economic needs staring you in the face take precedent over future events,” she tells Yahoo Parenting. “But it’s an ill advised move to be thinking only of the here and now.”

And she should know. Khalfani-Cox recently lost her sister (mom to an 11-year-old daughter) when she died unexpectedly at just age 49. “Mercifully, she did a lot of the right things and had plenty of life insurance,” says the College Secrets author. “It’s going to be longer-term blessing for her daughter, but when I say that tomorrow isn’t promised, believe me, I know. The last six months have not only been emotionally devastating for our family, they’ve really driven home the point that we need to have finances in order.” Khalfani-Cox says she actually recently reviewed her own insurance and increased her coverage in the wake of their loss. “Parents can be 30 something and think, I’m not going to die until I’m in my 80s — but you still need to plan ahead.”

The coverage people sign up for through work isn’t enough, either, she says.

“Typical employer-based life insurance provides for one or two times your salary, which leaves most people woefully uninsured,” says Khalfani-Cox. “The general recommendation is to have 5 to 10 times your annual salary in coverage, so you’ll need an outside policy to supplement the difference.”

Cruze, co-author of Smart Money Smart Kids with Ramsey, recommends even more — about 10-12 times your annual income. “You want enough money to replace the deceased spouse’s income and allow your family to live comfortably,” she explains.

It’s a lot to wrap your head around, for sure, which is why Khalfani-Cox suggests starting small when you begin to get your family’s finances in order. “Make a small checklist, just three to five things, and put a deadline next to each,” she says.

First, get a will drawn up if you haven’t already. “Wills aren’t just for rich people,” she notes. “Anybody who has a child should have a basic will and testament. Don’t think it’s only about ‘Where should I put my vast investment portfolio?’ It’s about who should take custody and control of your minor children, who should have your wedding ring/book collection/heirloom from grandma. It helps bring your family closure.” Not to mention saves them from costly and time consuming probate court, where your family will have to go to settle distribution of your assets and child custody issues if you haven’t designated your wishes in a will. A simple state-specific will from an online forms company is a good place to begin, advises Ramsey, author of The Total Money Makeover.

Next, secure sufficient life insurance for you and your spouse — even if one of you doesn’t work outside of the home. “A stay-at-home parent who has zero income still needs life insurance,” explains Khalfani-Cox. “If that person passed away, the other parent wouldn’t be able to continue working uninterrupted without having to arrange for, and often pay, someone else to do all of the things that the late spouse took care of, including childcare, cooking, cleaning, transportation, and such.” 

As for the type of insurance, Ramsey recommends 15 - 20 year, level term life insurance, noting that “premiums generally increase as you get older, so buying sooner rather than later can save you money.” He advises parents to stay away from whole life policies. “They’re a rip off,” he says. “They’re too expensive and the rate of return is historically low.”

Finally, even if the figures or the amount of time you’re talking about seem mind bogglingly large, don’t stress about what they will mean for your family month-to-month now. “This isn’t one of those things that means that if you get it, you’re not going to be able to send the kids to summer camp,” says Khalfani-Cox, who estimates most policies will cost you around $50 a month. If $50 isn’t something that fits into the budget, cut something to make it work, she advises.

“As parents, we teach our kids to look both ways before they cross the street,” says Khalfani-Cox. “We prepare them for the unexpected because we want them to be safe healthy and happy. And if you truly value those things, one of the ways to guarantee their financial safety and emotional wellbeing in the future is to take steps now that will really benefit them when you’re gone. Life insurance is a need, not a want.”

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