It hits you when you’re driving your new baby home for the first time: Another human being is going to be relying on you a lot for the next 20 years. Not just emotionally—financially, too.
According to a 2014 study by LIMRA, an insurance and financial services trade association, four in 10 people who bought life insurance said that major life changes, including marriage, children and buying a house, motivated them to get life insurance. “When it gets right down to it, that’s when people tend to think about it more,” says John Deremo, executive vice president and chief distribution officer for life insurance at AIG Financial Distributors.
When thinking about who needs life insurance, new parents should consider the financial protection they need if one of them have an untimely death.
What’s life insurance?
A life insurance policy provides beneficiaries with a lump sum payout when the insured person dies. To buy a policy, you pay a yearly premium determined by your age and desired level of coverage. In the event of your death, the policy’s payout helps your beneficiaries pay for expenses you might have otherwise paid for.
“Having a life insurance policy could mean a spouse or children won’t have to sell assets to pay bills or taxes” in the event of an unforeseen death, says Whit Cornman, director of media relations at the American Council of Life Insurers.
What types of coverage are available?
There are two types of life insurance: whole and term life insurance. With whole life insurance, beneficiaries can claim a death benefit when the person with life insurance dies. These policies also accumulate cash value and can be borrowed against to cover expenses during the insured’s lifetime.
With term life insurance, the more popular option, the person carrying the life insurance insures a limited period of his or her life—for instance, 10, 20 or 30 years. New parents with tighter budgets should consider getting term life insurance quotes, because the coverage it is less expensive than whole life insurance and covers the most critical period of raising a child
With either a term policy or whole life policy, you also have the option of choosing a plan that offers level premiums. In that case, you’d pay the same yearly rate for the entire period you are insured. With other plans, premiums become more expensive as you age. For a new parent, choosing between whole or term life insurance can be challenging, particularly as it requires thinking about one’s own death.
For those who can’t decide which policy best suits them, there’s some flexibility, Cornman says. “Some term policies can be renewed at the end of a term,” he says—though it should be noted that premiums typically increase upon renewal and, unlike whole policies, term policies don’t typically accumulate cash value. “At the end of a term, you also may be able to convert the policy to a permanent policy.”
[Life insurance quotes are available through NerdWallet’s Life Insurance Comparison Tool.]
In addition to renewing, you can also change the type of policy you have. Some term policies, called return of premium term life, allow you to be reimbursed for all your premiums if you outlive the period for which you’re insured. Others allow you to accelerate the death benefit if you contract a serious illness.
Who should be covered?
Generally, when people buy life insurance, they want to insure the main income-earning parent. While that’s important, buying life insurance for stay-at-home parents should also be a high priority.
In a 2014 survey of more than 15,000 mothers, Salary.com estimated that the average stay-at-home mother’s household contributions add up to $118,905 per year. In the event of a stay-at-home parent’s death, the death benefit from life insurance could help pay for childcare, housekeeping, tutoring, meal-planning, schedule coordination and other challenges caregiving parents confront every day.
“I think it’s critical that new parents ask themselves what they would spend hiring someone else to perform these important functions for the family, and then consider purchasing a term policy on the stay-at-home parent,” Deremo says.
You can also purchase life insurance for children, but because a child’s death doesn’t usually carry the financial implications that a parent’s does, these types of policies are more controversial. While some parents find that contributing to a whole life insurance policy is a good way to provide their kids with financial security in adulthood, many parents find that other investment instruments, such as 529 plans or IRAs, are better options.
Planning for the future
Life insurance may not be a top financial priority for all new parents. If you or your spouse already has a large estate or substantial assets set aside in case of a sudden death or loss of income, a life insurance policy is probably unnecessary. But for those new parents who are still building up a financial legacy for their young ones, or for parents who have maxed out their other savings vehicles, this type of policy provides important protection.
Instead of putting off the purchase in hopes of finding the perfect plan, Deremo suggests that new parents looking for life insurance simply purchase a plan that fits their current budget. “Get the coverage in place,” he says. “And know that when you lock that up, you always have time to adjust that as time goes on.”
Image of parents and baby via Shutterstock.