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Life insurance for new parents and young families
A policy can help to take care of your spouse and children when you're no longer around.
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Becoming a parent for the first time is one of life’s great joys, but it also means a lot of new responsibility. Life insurance can help you make sure your family is taken care of if anything ever happens to you.
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How does life insurance work?
Think of life insurance as a contract — as long as you pay your premiums, your life insurance company will pay out your beneficiaries when you die.
What life insurance policy should I buy?
There are two main types of policies to choose from:
- Term life insurance. The simplest and cheapest policy, this coverage lasts for a set period of time — like 10, 15 or 20 years. Ideally, you’ll want to choose a term length to carry your kids through college, when they enter the workforce and start making their own money.
- Permanent life insurance. Whole, universal and variable life policies offer lifelong coverage. They also build cash value over time, and once you’ve built up enough, you can start taking out loans against your policy — which is helpful if you anticipate large expenses in the future, like college tuition.
How much life insurance do I need?
To figure out how much coverage you and your family need, consider the following:
- Your income. Life insurance is primarily designed to replace your income and help your family to cover their living expenses when you’re gone.
- Outstanding debt. Your debt doesn’t die with you, so factor in any balances on your mortgage, student loans or credit cards.
- Assets. A life insurance policy can protect any assets in your name and allow them to stay in the family.
Add up the value of those things, and aim to take out a policy to match.
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How much does life insurance cost?
There are several factors that affect the cost of life insurance, including:
- The types of coverage you choose. Your premiums will depend on what combination of life insurance, critical illness insurance, personal accident insurance and disability insurance you get.
- How much coverage you get. You’ll be able to choose how high you want your life insurance payout to be. A higher benefit means higher premiums.
- Your age. As a general rule, the older you are, the more your coverage will cost.
- Your gender. Coverage is usually cheaper for women than men.
- Your health. The better your overall health, the less you’ll need to pay for coverage.
- Your habits. Smoking is associated with a long list of health problems, so regular smokers have higher life insurance premiums.
- Your hobbies and pastimes. Risky hobbies like scuba diving, rock climbing or skydiving will raise your premiums.
Tip: Keep your costs down
A good way to ensure your life insurance is affordable is to review it regularly as your situation changes. For instance, as your child gets older and you pay off more of your mortgage, you might need less coverage. You can talk with your insurer about lowering your benefits — and your premiums. You might also want to look in decreasing term life insurance, which is designed to drop off over time in line with your financial obligations.
Do both parents need coverage?
Whether or not you and your partner both need coverage depends on your personal situation. If both parents earn an income, then protecting those incomes is definitely worth considering. But if one of you earns significantly less than the other, and you could easily get by without that income, consider whether insurance is worth the monthly premium costs.
Why stay-at-home parents should buy coverage
While stay-at-home parents may not receive a paycheck as such, they play an essential role in running the household. Their duties may include cooking, cleaning and driving the kids around — all valuable things that your family will need to hire someone else to help with if you die unexpectedly or suffer a serious health problem.
In that case, a stay-at-home moms life insurance policy can protect your family financially when you’re gone. It can help them cover their expenses, such as:
- Childcare costs
- Household maintenance costs — like laundry, cleaning and cooking
- Education costs — which is especially key if you homeschool your children to some extent
- Your funeral and burial costs, as well as end-of-life expenses like unpaid medical bills.
Naming beneficiaries
When you buy life insurance with a death benefit, you’ll need to name a beneficiary to receive the money when you die. For most people, this means their spouse or partner.
Naming a child as a beneficiary
If you decide to nominate a young child as a beneficiary, they will be entitled to access the life insurance benefit when they reach 18 years old— or 21 in some states. Until they’re of age, their custodian will be able to access the money to provide for their care. You can also name your chosen guardian as the beneficiary of the life insurance payout — or even divide up the benefit between multiple beneficiaries.
If you’re worried that 18 or 21 is too young for your children to sensibly manage the money they receive, you can set up a trust with guidelines for when and how they’ll receive the money.
Seek independent legal advice for more information on the best way to structure your life insurance benefit payment.
Bottom line
Hopefully you’ll be there to support your children well into their adult lives. But if something does happen to you, life insurance can make sure they’re provided for. Compare life insurance companies to find a policy that fits your needs and budget.
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