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When my husband and I got married, we knew we wanted to get life insurance right away. We had bought our home the year before and even though we didn't have kids yet, we wanted the other spouse to be able to stay living in that home if one of us died unexpectedly.
At the time we got married, I was beginning to work as a financial adviser and was learning the ins and outs as well as the importance of life insurance firsthand. I wasn't a stranger to the concept, though. My dad had developed terminal liver cancer when I was in my early 20s and had taken his life insurance money out early to travel the world with my brothers as a last hurrah before he passed.
Because of these experiences, my husband and I knew we didn't want to take any chances with our health and got the insurance as soon as we could. Both my husband and I were in good health, and we decided on 20-year, $1 million term life insurance policies for each of us.
Fast forward a few years after purchasing life insurance and we now have two daughters, a 3 year old and a 1 year old. As a former high school personal finance teacher and now a financial coach, I've thought a lot about the lessons I want to teach my own children about money. My husband and I are very open about our finances, have regular money "dates," and want our children to understand the importance of managing money responsibly while also balancing enjoying life.
What I hope my kids would do if they ever got our life insurance money
If my husband and I were to die and our children were old enough to be in charge of their own life insurance inheritance, I feel strongly about what they would do with the money: It's my hope that they would pay down debt and invest the rest in index funds.
Paying off debt
The reason I feel so strongly about paying off debt is my husband and I have struggled with debt in the past and when we paid off our consumer debt, it was like a veil of anxiety and fear was lifted. We have also gotten more into the financial freedom movement within the past two years, and are big on paying down debt and investing as aggressively as possible so we can retire early if we wish.
If my children have student loan, car loan, or credit card debt, I would want them to pay those debts off first. These types of debt, especially credit cards, tend to have the highest interest rates. I know firsthand the freedom that comes with having no debt, and would want my children to experience that same type of freedom.
Investing in index funds
After paying down any debt they have, I would want my children to invest the rest of their inheritance into index funds. I personally love index funds because they have low fees and typically outperform other investments. It's hard to find funds that outperform the market, and by trying to do so you end up paying a lot more in fees. I'm hoping to teach my children these basic investing lessons as soon as they are able to grasp the concepts.
They then could use this money down the line to make a larger purchase, such as buying a home or starting a business, or they could keep it invested until they felt they needed it.
Another option this would give my children is the ability to live off of some of the earnings. If they were to invest the majority of their inheritance they would very likely be able to live off of the invested amount (at least for a little while) by taking a small withdrawal each year. In the event that my daughters were in jobs they disliked, wanted to stay home with their own children, travel, or take a break from a career that was burning them out, this would give them the option to take that time away from earning income.
The beautiful thing about life insurance is that it provides options for your loved ones. It doesn't even have to be a large policy to make a big difference in their lives. For us, the most important thing is that our children would still be well taken care of if they were under the age of 18 and with guardians. And if they are over the age of 18, then a life insurance inheritance would allow them the ability to increase their financial freedom and security so they can then pass these principles along to their own children.