You might not have heard of shared dollar life insurance, but it's an increasingly popular way for families to share the expense of a life insurance policy.
Let's take a closer look at how families can use this type of policy to share the costs of coverage between multiple generations.
What Is Shared Dollar Life Insurance?
It's a permanent life insurance policy that covers (a) one or more members in an older generation of a family, such as a parent or grandparent, or (b) one or more members in the younger generation (usually, grown children). The cost of the policy is shared between both generations.
This kind of plan spreads financial responsibility across at least two families, and helps the younger generation with strong incentives to save and plan for the future.
Looking at life insurance as a partnership helps everyone appreciate its benefits. The older generation knows they're protecting the younger generation against financial hardship by providing them with a death benefit through the life insurance policy. The younger generation knows the older generation is looking out for them and doing as much to help with future financial planning as possible. But it's not a free ride—every generation needs to contribute to help keep the policy in force.
There are several different ways you can set up a shared dollar policy. Here are the most common:
- Split the cost 50/50 between two families (i.e., a parent and grown child)
- Designate a certain number of years for the older generation to pay, then have payments switch to the younger generation (i.e., parents pay for 10 years, children pay for rest of the policy)
- Arrange a certain percentage for each family to pay (i.e., parents pay 75% for first 5 years, 50% for next 5 years, 25% for next 5 years, etc.)
- Select a "split the difference" arrangement, where the parents pay the cost of a minimal policy (such as a term life policy), and the children pay the balance
Selecting the method that's right for you will depend on your family and your financial capabilities. It's a good idea to talk about this kind of plan with your family members to see how they feel about contributing to the policy.
Of course, the #1 reason to buy any life insurance policy is the financial security and peace of mind it brings your loved ones. It's all about leaving them a legacy of love and security.