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A New Parent’s Guide to Life Insurance

Both parents need life insurance. Here's how to get the right coverage.
March 3, 2017
Insurance, Life Insurance
A New Parent's Guide to Life Insurance
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We adhere to strict standards of editorial integrity. Some of the products we feature are from our partners. Here’s how we make money.

Life insurance might not have crossed your mind before there was a newborn relying on you. But having a baby changes everything.

Getting coverage is a simple way to make sure your family will be financially protected if something happens to you.

Let’s walk through what you need to know:

How life insurance works

Types of life insurance

Which type of policy to buy

Why both parents need coverage

How much life insurance to buy

Naming beneficiaries

How life insurance is priced

How life insurance works

Life insurance pays money to a beneficiary — a spouse, for example — when the insured person dies. The payout is called a death benefit. You list the beneficiary on the policy when you buy coverage.

Here’s an example of how it could work: You buy a $1 million policy insuring your own life and name your spouse as a beneficiary. If you die while the insurance is in effect, your spouse receives the $1 million payout. The money can support the family in your absence, such as paying the mortgage and funding your child’s college education.

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Types of life insurance

There are two main types of life insurance: term life and permanent life.

Term life is temporary. Term life is the most affordable kind of life insurance. You can buy a lot of coverage for a low price. You buy a policy to cover a time period, such as 10, 20 or 30 years. If you die during the term, the policy pays the beneficiary. The coverage stops at the end of the term, and the policy pays nothing if you’re still alive.

» COMPARE: Life insurance quotes

Permanent life insurance lasts your entire life. It pays out whether you die next year or in 50 years. Whole life, universal life, variable universal life and indexed universal life are types of permanent life insurance.

These policies are more complex than term life because they include an investment component known as cash value. The cash value account grows slowly, tax-deferred.

Once the cash value is substantial — after, say, 15 to 20 years — you can borrow against it, use it to pay premiums or use it to buy additional coverage. Any outstanding loans against the cash value at the time of death will decrease the payout to the beneficiary.

You can even surrender the policy for the cash value, minus a surrender fee. But that ends the coverage, so the beneficiary would receive no payout upon your death.

Which type of policy to buy

Buy term life if:Buy permanent life if:
  • You want the simplest, most straightforward policy.
  • You want the most affordable coverage.
  • You need coverage for a fixed period. For example: You want to cover the years of raising children or repayment of debts, such as a mortgage.
  • Someone will count on you financially for the rest of your life.
  • You want a policy that builds cash value.
  • You have a large estate that would be subject to estate taxes when you die.
Term life insurance is sufficient for most families, and more affordable. Buy a term long enough to cover the years when you’re building savings, paying off debts and have the costs of raising a child.

Permanent life insurance is useful if you have a lifelong financial dependent, such as a child with special needs. If you’re wealthy, you can also use permanent life insurance as an estate planning tool. Your heirs could use the life insurance payout to pay the federal or state estate taxes, if any will come into play.

Term life insurance is sufficient for most families. It’s cheap, so most people who need coverage can buy enough to create a strong safety net. Buy a term long enough to cover the years when you’re building savings, paying off debts and have the costs of raising a child.

Ideally, at the end of the term, you won’t need life insurance anymore because the kids are grown and financially independent, your mortgage and other debts are paid off, and you’ve accumulated enough savings for your spouse to live comfortably in retirement.

Permanent life insurance is useful if you have a lifelong financial dependent, such as a child with special needs. If you’re wealthy, you can also use permanent life insurance as an estate planning tool. Your heirs could use the payout to cover federal or state estate taxes, if any will apply.

Think you might need permanent life insurance, but can’t afford it? Most term life policies are convertible to permanent life insurance. You can buy a term life policy and convert portions of it to permanent coverage over time.

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Why both parents need life insurance

It’s not just the breadwinner who needs life insurance. Stay-at-home parents should have coverage too, even if they don’t earn income.

A stay-at-home parent provides valuable services, such as child care, that the surviving parent would have to pay to replace. A life insurance payout could also enable the surviving breadwinner to take a few years off work while the family regains footing.

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How much life insurance to buy

To figure out how much life insurance to buy, think about your family’s financial needs if you weren’t there to support them. Here are four steps:

  1. Decide how many years of income you’d like a life insurance policy to replace, and multiply your income by that number.
  2. Add other financial obligations, such as debts and college costs for your children.
  3. Include the cost of services you provide that would have to be replaced
  4. Subtract savings and any other life insurance coverage you already have.

NerdWallet’s life insurance calculator takes you through the process and can help you estimate an amount to buy.

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Naming beneficiaries

When you buy a policy, you name a beneficiary, such as your spouse, to receive the life insurance money. Don’t name your young children, though, even if you want the money to benefit them. If the beneficiary is a minor when you die, the life insurance company can’t pay the benefit until the court appoints a guardian.

Instead, one option is to set up a life insurance trust to hold money and property for your children and name the trust as the beneficiary. You appoint a trustee, such as your spouse or another adult, to manage the trust according to your instructions. An attorney can help you set up a trust, and the life insurance company can tell you how to word the beneficiary designation.

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How life insurance is priced

The annual price depends on the type of policy, the amount of coverage and, if it’s a term life policy, the length of the term. Other factors include:

  • Age: The younger you are the less you pay.
  • Sex: Women generally pay less than men.
  • Health: The healthier you are the less you pay.
  • Smoking habits: Smokers pay more than nonsmokers.
  • Hobbies: People with risky hobbies, such as scuba diving, pay more for coverage.

Life insurance prices vary among companies. You can get term life insurance quotes online, but you’ll want to work with a financial advisor if you’re choosing a permanent life insurance policy.

With life insurance, you’ll know your family will be on solid financial ground if you can’t be there. That might even help you sleep better at night — at least when the baby’s not up.

» MORE: The best life insurance companies

Barbara Marquand is a staff writer at NerdWallet, a personal finance website. Email: bmarquand@nerdwallet.com. Twitter: @barbaramarquand.