The loss of a parent is a tragedy that leaves a family to re-adjust to a new reality with fewer earnings. Bills, childcare, education, and other financial commitments now have to be covered by the surviving spouse or the children despite the misfortune. It is therefore important that the family chooses what they would want to cover using the proceeds from their parent’s life insurance. They should discuss and prioritize their financial obligations while leaving room to meet any other necessary needs.
Assessing Essential Household Expenses
The first thing that surviving family members should do when assessing what their parent’s life insurance should cover is to identify the costs that are necessary to sustain the household. The mortgage or rent, groceries, household bills and utilities, and other regular expenses need to be accounted for. The surviving family members should review the bank account and any credit or charge accounts to determine the expected monthly expenses. In addition, they should identify which of these costs they can reduce or do without for a period as they deal with the loss of their parents.
The family should then cross reference these financial needs against the expected monthly income. They might be able to depend upon other sources such as the surviving parent’s retirement benefits, salary, or other income. The calculation should however be based on realistic assumptions, for instance, if the deceased parent shared childcare duties and the surviving parent will take a paycut to take care of the children. The family should also consider if they will need to make adjustments to long-term needs such as housing and transportation in light of the new financial realities.
Protecting Housing and Outstanding Debts
Housing expenses typically comprise the largest budget item for most families. The surviving family members should therefore consider whether they would need the money to cover their mortgage or rent and other housing-related costs such as home maintenance, redecorating, or purchasing a more affordable house. They should also consider if they can reduce their monthly housing expenditure by relocating.
Credit card payments, loans, car payment, and any other debt obligations should also be prioritized. The family should identify all the liabilities with their terms, repayments’ schedules, and any insurance or survivorship benefits that may reduce the outstanding amount. They should leave room to pay off some of the debts, especially those with high-interest rates. The family members should also consider consulting a financial planner to compare the cost of continuing to pay these debts.
Planning for Children’s Long-Term Needs
Childcare and education costs after the loss of a parent can be very expensive depending on the children’s ages and their educational needs. The family should budget for these needs by estimating them based on the children’s current ages and their expectations. For instance, if they anticipate enrolling a child in college, they should set aside the money to cover the first year’s fees. Children’s needs change as they grow, so the family should consider allocating funds to cover their basic needs, extracurricular activities, and schooling as advised by a financial advisor.
Childcare costs are also a significant budget to consider when deciding what to cover with life insurance. These costs might include after-school activities, crèche fees, and transport. Caregivers’ expenses should also be considered if the surviving parent will be working and cannot take care of the children. Childcare costs should be determined based on realistic assumptions rather than temporary or occasional assistance because they form a significant part of the household budget. After-school expenses and activities should also be factored in although they may not be essential.
Establishing a Sustainable Financial Plan
It is advisable that a proportion of the parent’s life insurance proceeds go into savings to provide for any emergency or unexpected needs. The family should consider setting aside cash to cushion any loss or unexpected expenditure that may occur. Allocating some money to short-term savings will also enable the household to meet its monthly needs without having to liquidate some of the investment funds. The amount to set aside for these expenses depends on the family’s annual income, monthly expenses, and other financial obligations.
The family should apportion the money depending on when it is likely to be needed. Hence some short-term costs may require readily available funds while those that are further away can be placed in a separate investment account based on their needs. The family should also consider the available options under their parental life insurance policy. In case one of the parents has a policy with stated benefits payable upon their survival or death, the family should understand the terms of the policy. In the event of a life insurance claim, the children should also consider getting the money as soon as possible as it will be easier to invest it for long-term needs rather than save it.
Families that buy term life insurance should get a policy that suits their needs at the time of purchase while considering future needs. Term life insurance provides financial support for specific financial needs for a period of time. It is therefore advisable that the family identifies these financial needs based on the ages of the children and the surviving spouse’s capacity to provide. For instance, if the deceased parent provided for the college fees for the children, the life insurance should cover these future costs.
Conclusion
The choice of what to cover using life insurance after the loss of a parent affects a family’s financial needs for a long time. They should consider covering long-term expenses such as housing and future education costs while prioritizing immediate needs such as paying off debts. The family should also create a financial security plan that will see them save enough to cover their basic needs and prepare for an emergency.
