While baby makes three is certainly a time for celebration, it also introduces the sobering reality that there’s a little bundle of joy now depending on you. For that reason, it’s important to protect your child financially should something happen to one of his or her parents.
If you’re considering life insurance, you’re not alone. According to Limra’s 2016 Insurance Barometer study, nearly nine in 10 consumers (86%) agree that most people need life insurance, and 77% of millennials are likely to recommend owning life insurance to others. With a life insurance policy, the parent left to care for the child can maintain the current standard of living, including paying the mortgage, other expenses and saving for the child’s future education.
Before you heed the call to protect your young one, familiarize yourself with the basics of finding and choosing life insurance. The following life insurance primer will help you navigate this new world of life insurance as a new parent.
How life insurance works
Life insurance is fairly straightforward. If you or your spouse are insured and die, a payout is disbursed to the beneficiary, who is generally your spouse or a secondary beneficiary, should you and your significant other die together. The payment, known as the death benefit, is paid after a certified copy of the death certificate is filed with the insurance company.
Most life insurance claims are paid within 30 to 60 days. There are a few circumstances when payment may not be made. Such instances include during the incontestability period, which is usually two years, when the life insurance company can legally challenge the policy. This would occur if it determines you failed to disclose, prior to being granted the policy, something that would affect your eligibility or the type of coverage. After two years, the life insurance company can no longer deny the life insurance claim for this reason. Then there are exclusions to coverage, including suicide, hazardous activities, death in a country considered dangerous and death from military active duty or acts of war.
Consider your life insurance options
There are two main types of life insurance from which to choose. Which you select will depend on your budget and specific circumstances.
- Term life insurance. With this type of insurance you pay a premium for a specified period of time, usually 10 or 20 years. Such a policy pays out a specific amount of money when the person dies. Once the policy ends, there is no money remaining in the policy. Term life is the most affordable type of life insurance policy. This can make it possible for young couples to buy sufficient coverage.
- Whole life insurance. This type of insurance policy covers insured people as long as they live. These policies also work as savings vehicles. A part of the premiums you pay are invested, and you can pull from that tax-free while you’re alive. These are the most expensive types of life insurance policies.
Buy term life insurance if:
- Your budget is limited and you want the most affordable coverage.
- You want a simple, easy-to-understand policy.
- You only need coverage for a fixed period — such as while children are growing up.
Buy whole life insurance if:
- You have a dependent who’s going to count on you for living assistance for the rest of yours or that person’s life.
- You wish to leave money to someone, no matter when you die.
- You want a policy that also serves as a long-term investment.
- You have a substantial estate and will be subject to estate taxes upon your death.
What determines the cost of life insurance?
In addition to whether the policy is term or whole life, there are other factors that affect the cost of a life insurance policy. These include:
- Gender: Women usually pay less than men
- Age: The younger you are, the less you pay
- Health: The healthier you are, the less you pay
- Hobbies: If you participate in risky sports, such as scuba diving or mountain climbing, you pay more
- Smoking habits: If you smoke, you pay more than nonsmokers
Get life insurance for both parents
Not just the person making more of the money requires insurance. Even if they don’t earn income, stay-at-home parents need life insurance coverage, because they provide the service of caring for the children, which will cost money should the caretaking parent pass away. A policy could also give the surviving parent the ability to stay home with the children, if necessary.
Determining how much life insurance to buy
Figuring out how much life insurance to purchase requires that you consider the financial needs of your family if you were gone. Here is a formula for doing that:
- Determine how many years of income you wish to replace and multiply those years by your income. For instance, 10 years at $75,000 a year equals $750,000.
- Add to the $750,000 additional costs, including debt and your child’s projected college costs. For example, an additional $400,000 in debt and future costs would push the amount up to $1.1 million. If you have savings, subtract that amount from this total.
- Check your grand total against the amount you get when using a life insurance calculator, such as this one at USAA.
When you have a new baby in the house, you want to spend time enjoying your child rather than worrying about what will happen financially if you’re not around. If you take care of your life insurance needs, the only thing keeping you up at night will be late night feedings and diaper changes.
To shop life insurance companies and figure out the best policy for your financial situation, visit our life insurance reviews page.
Julie Bawden-Davis is a widely published journalist specializing in personal finance and small business. She has written 10 books and more than 2,500 articles for a wide variety of national and international publications, including Parade.com, where she has a weekly column. In addition to contributing to SuperMoney, her work has appeared in publications such as American Express OPEN Forum, The Hartford and Forbes.