A New Parent's Guide to Life Insurance

Becoming a new parent is an exciting (and exhausting!) time. Suddenly, your world is bigger and broader than ever. You have people who depend on you now. And while you’re missing sleep, changing diapers, and warming bottles, it can be hard to think of anything outside of these immediate precious moments. Becoming a new parent is the perfect time to carefully think about your responsibilities and what kind of tools can help you best care for your family.

Life insurance is one of these tools.

Do You Need Life Insurance?

When you’re basking in the glow of new beginnings, it can be difficult to think about endings.

The idea of death can feel very far off - something that happens to grandparents (or great-grandparents), not new parents.

But accidents and unexpected illnesses happen every day. In the blink of an eye, a drunk driver or medical diagnosis could change everything for your new family.

If you were to pass away tomorrow, could your spouse continue to care for your new baby without your income?

Would your spouse be able to pay for funeral and burial costs, which can average $10,000 in the US? What if you had large end-of-life medical bills?

Life insurance can provide a safety net for your family if something happens to you.

Your benefits provide funds that your spouse and children can use for:

  • Funeral and burial costs
  • Medical bills
  • Paying off debt or a mortgage

Your life insurance benefits could even be used to help with future college tuition or a down payment on a house for your kids when they’re grown - allowing you to provide for your family well into their future.

Can You Afford Life Insurance?

Starting a family can significantly change your household finances.

You or your spouse may leave the workforce to care for a new baby or cut work back to part-time hours and wages. If you both continue to work full-time, you may need to pay for childcare.

And baby supplies can add up fast: diapers, food, clothes, car seats, toys…

Adding an additional cost for something like life insurance can feel burdensome.

But what you may not realize is just how affordable life insurance can be. Many term policies can offer you coverage for around $20 to $50 per month for a $250,000, $500,000, or $1M policy.

What Kind of Life Insurance Should You Get?

There are two different types of life insurance available: term and whole life.

Term Life Insurance

Term life insurance is the most popular type of life insurance for new parents and the most affordable.

As mentioned above, you can typically get a term life policy for around $20 to $50 per month.

Term life insurance offers you coverage for a specific period of time. This period of time, or term, can range from 5 to 30 years. If you were to pass during that term, your beneficiaries would receive your death benefits. If you survive your term, the policy ends with no benefits paid out.

Term life is so popular with new parents because the term chosen is typically long enough to ensure your kids are grown and self-sufficient by the end of your policy period. 20 or 30 years from now, your adult children are less likely to rely on your income and be able to care for themselves if something happened to you.

If you still want insurance coverage at the end of your term, many term policies will provide an option to convert to a whole life policy.

To put it in perspective, stopping at the coffee shop for a large latte on your way to work every day can cost you twice as much per month than premiums on a $1M term life insurance policy.

Whole Life Insurance

Whole life insurance offers guaranteed death benefits for life.

Unlike a term policy, which only pays benefits if you pass within the specified term, a whole life policy will pay your beneficiaries at the time of your death. Whether you live another 10 years or to the age of 100, you’re guaranteed that your financial investment in life insurance will pay off.

Whole life insurance also comes with a savings component, known as the cash value.

When you make whole life premiums, a portion of your payment goes toward your death benefits coverage. Another portion of your premium goes toward the cash-value component.

This cash-value accumulates over time, tax-deferred.

In the future, you may choose to access the cash value of your policy. You may take a loan out against your cash value, for example, or withdraw all or a portion of your cash value.

(Important note: If you withdraw cash or fail to pay back your loan, it can decrease the amount of death benefits going to your beneficiaries.)

Because of the two defining characteristics of a whole life policy - guaranteed death benefits and the cash-value component - whole life premiums tend to be vastly higher compared to term life premiums.

Whole life is a good choice if you:

  • want to lock in premium rates for a lifetime
  • want to invest for a rainy day
  • are concerned about future health issues
  • have a lifelong dependent such as a child with special needs
  • can afford higher premium payments

Should You and Your Spouse Get Life Insurance?

Life insurance can be a wise investment for you and your spouse - even if your spouse isn’t working.

For a spouse who has left the workforce to stay home and raise children, a life insurance policy can be tremendously helpful in a worst-case scenario.

Imagine if you lost your stay-at-home spouse while you have a young child at home.

According to Salary.com, the average worth of a stay-at-home mom (or dad) is $143,102.00

Whether you decided to leave your job to become the full-time caregiver, housekeeper, cook, and activities director for your household or decided to pay someone else to assist with these duties, there would definitely be an impact to your household finances.

And if your spouse works, the loss of a second income can be equally disruptive.

If you and your spouse both have term life insurance, your combined payments can still be reasonably affordable - averaging less than $100 per month for healthy, young adults.

Insuring both parents is a smart move when you’ve got a new baby or young family.

Should You Have Life Insurance for Your Kids?

About 20% of parents and grandparents have purchased life insurance policies for their kids, according to a survey by industry groups Life Happens and LIMRA.

Most life insurance policies for kids are whole life policies. Once a child reaches adulthood, parents or grandparent can transfer ownership of the policy to the child.

You may also be able to add a small amount of coverage for a child on your own term life policy; stand-alone term life policies are typically not available for children.

Reasons parents and grandparents have for insuring their children include:

  • Begin early investment in policy cash-value
  • Guaranteed coverage, even if medical issues arise later in life
  • To cover funeral expenses in the event of a worst-case scenario

The primary reason to get life insurance is to replace income, cover debts, and pay for funeral expenses in the event of someone’s passing.

If you’re considering a child life policy simply for the cash-value investment, it may be worth talking to a financial advisor to find out what all of your options are for investing/ saving for your child’s college and future.

Starting a new family brings a brand new level of responsibility to your world. Not only do you need to consider how to care for your new baby, you also have to consider what would happen to your family if something unexpectedly took you away. Life insurance can help bring you peace-of-mind that you can take care of your new family now - and in the future - no matter what may come your way.

 

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