How to Build a Life Insurance Plan for Your Family

Lynn Leritz is a vice president of life insurance at Northwestern Mutual.

No one likes to think about the loss of a family member. But one of the greatest gifts you can give your family is a plan that protects their future. It allows you to make sure they’re covered—and gives them the means to live the life you imagine for them.

Life insurance is a critical part of your family’s financial planning, and it’s worth thinking about life insurance for each family member—not just for those earning income. As you’ll see, there’s more to life insurance than the death benefit.

We’ll explain what life insurance can do for your family. Then we’ll explain special “add-ons”—called riders—that you can use to tailor a plan to your family’s needs.

What is family life insurance?

Family life insurance is a family plan that includes a life insurance policy for each person in your family—from the youngest child to the oldest adult.

Though it may not seem necessary to purchase a policy on children, by doing so, you’re setting your kids up for some important benefits down the road.

Each person’s situation is unique, so as you build your family life insurance plan, it’s best to work with your financial advisor to identify the best policies for you and your family.

Let’s start by digging into why insurance makes sense for every family member.

Who to insure

Life insurance for people earning an income

If your family relies primarily on your or your spouse’s income, life insurance can protect them financially if you or your spouse passes away. The death benefit can help your family afford to stay in their home, pay for daily living costs and fund major expenses—such as a college education. When considering a life insurance policy for someone earning an income, you’ll want to think about what you’ll need to replace that income—and keep major savings goals on track—if the main income earner is gone.

Life insurance for caregivers

When setting up a family insurance plan, most people understand the need to protect lost income but don’t give much thought to insuring family members who contribute in equally important ways. If one family member, such as a stay-at-home spouse or a grandparent, plays a large caregiving role, losing that person may add significant expenses to your household.

A life insurance policy can help cover additional costs such as childcare, eldercare, and household management that would arise if something were to happen to a family caregiver.

Life insurance for children

You may think there’s no reason to get life insurance for your children. But a life insurance policy may have several benefits that can give them a financial head start. Here’s how:

It protects their insurability

Buying permanent life insurance for healthy children at a young age locks in low premiums and ensures that they’ll have a life insurance policy down the road. This can be especially important if they later develop a chronic disease or go into a hazardous line of work that would otherwise disqualify them from life insurance coverage.

It allows them to grow cash value

While all permanent life insurance can build cash value that’s tax-deferred, whole life a type of permanent life insurance with cash value that’s guaranteed to grow over time. That creates a financial safety net that could help your children at several different points in their lives.¹ For example, some people borrow against the cash value to help pay for a wedding or make a down payment on a house.

It offers a death benefit

If the unthinkable were to happen, your child’s insurance policy could give you the chance to grieve without having to rush back to work. Their insurance policy would not only pay for funeral expenses, it could also give you the flexibility to take all the time you need at such a difficult time.

It has a simpler underwriting process

Life insurance usually requires a medical evaluation of the person being insured to determine risk. This is called underwriting. Because children are generally in good health , this process is usually simpler and faster than it is for an older person.

Life insurance for parents

Many people today find themselves in the “sandwich generation” where they are taking care of both children and parents. If your parents haven’t saved enough for retirement or end-of-life expenses, getting life insurance for your parents might help you protect your own financial future. You can work with them to set up a policy with you as the beneficiary. This can offer a financial safety net to help cover funeral expenses, outstanding debts or other financial obligations when they pass away. Here are other ways a policy on your parents can help:

• If your parents have a significant estate value, life insurance may help cover estate taxes upon their passing.
• If your parents provide childcare or similar help, you may need to pay for those services after they’re gone. A life insurance policy on your parents can help cover that new expense.

You’ll need to talk this over with your parents, since you cannot buy life insurance on another adult without their knowledge. Even if you’re the one who pays the premiums, they must be willing and able to apply for the insurance policy.

Different types of life insurance policies for your family

Once you’ve decided on who you need to insure, you’ll need to choose between two main categories of life insurance: term life insurance and permanent life insurance.

With term life insurance, your coverage is temporary, meaning that it will cover you only for a certain time period. Term life insurance is typically more affordable than permanent for the same amount of death benefit.

With permanent life insurance, your coverage is lifelong. As long as you keep your policy in place (and pay your premiums), it will eventually pay a death benefit. Permanent policies also build cash value that is guaranteed to grow, tax deferred, making them a flexible financial tool that can serve many purposes throughout your life¹.

In addition, to make the best coverage choices for your family members, it’s important that you understand the types of plans and available customization options (known as riders).

Family life insurance riders

You can tailor a life insurance plan to your circumstances with customizable add-ons, called riders. Riders can give you specific benefits and protection beyond your base coverage. (But keep in mind that not all riders are available on all policies.) These additional benefits can help make sure that you’ll have an insurance policy that fits your family today—and down the road.

Here are two commonly added riders:

• Waiver of Premium: The insurance company will pay your premiums if you become totally disabled² from a sickness or an accident.³
• Additional Purchase Benefit: You can buy additional policies at certain ages and milestones (like getting married or having a child), regardless of the insured person’s health at that time.

As your family life changes, riders can help a policy stay rightsized for each family member’s situation. You can choose to buy one or more riders now and drop them later when they’re no longer needed. Your advisor can help you decide what riders you should carry on your policies as you design your plan together.

How to build a holistic insurance plan for your family

Life insurance plays an important role in your family’s financial plan. It can protect each family member in different ways and at various stages in their life.

Life insurance for families can also be a flexible tool that works alongside investments and other financial instruments to help you reach your goals. The right policies can help protect your family and meet your financial objectives. In fact, research from EY, a professional services firm, shows that incorporating insurance with investments—rather than an investments only planning approach—can leave you better off financially.

Your Northwestern Mutual financial advisor can help you understand the various life insurance options for you and your family and help design a comprehensive plan that includes strategies to grow and protect your money. They can show you how your policies fit into your larger financial plan and help you and your family reach your goals together.

1 Utilizing the cash value through policy loans, surrenders, or cash withdrawals will reduce the death benefit; and may necessitate greater outlay than anticipated and/or result in an unexpected taxable event. Your policy's cash value typically becomes a useful source of funds only after several years of premium payments, which allows the cash value to build up.

2 Insured must be continuously and totally disabled for at least six months. As long as the insured’s total disability begins before the policy anniversary closest to their 60th birthday, premiums can be waived for the entire time they are totally disabled. If the insured’s disability begins after their policy anniversary closest to their 60th birthday, premiums will be waived until the policy anniversary nearest their 65th birthday. The ability to perform the substantial and material duties of the insured’s occupation is only one of the factors that determine eligibility for Waiver of Premium benefits. The Waiver of Premium benefit may contain exclusions and limitations. Eligibility for insurance, additional policy benefits and qualification for benefits is determined on a case-by-case basis. For costs and complete details of coverage, please contact a Northwestern Mutual financial representative.

3 With universal life, there are different types of waiver of premium riders. You can design the rider to cover a planned premium amount or just the expenses needed to keep the death benefit in force.