Once you get that positive pregnancy test, it doesn't take long for all of the planning to start. While it's fun to stock up on onesies and decorate the nursery, there so many serious topics to consider. Like, what are some things every new parent should know about life insurance? It can be overwhelming to think about, but understanding the basics of this type of coverage will help you make the best decision for your family.
When you're busy celebrating the new life you've created, thinking about tragic deaths definitely puts a damper on the mood. Even so, new parents should start looking into their options sooner rather than later. Scott Raymer, LUTCF, tells Romper that life insurance is essential because it protects your partner as well as your children. He says that aside from the extremely wealthy, "Typically, young parents do not have the financial resources to ensure their partners and children are able to remain in the home, and continue with their lifestyle should a parent die." Those are the things life insurance can help with.
That being said, there are also a few things to watch out for when you're shopping for the right policy. Scott Clark, MBA, tells Romper that because some life insurance policies have "investment aspects," life insurance can often be confused with a traditional stock market investment. He says, "Many agents will pitch [life] insurance as an investment first" and encourage clients to "put the cash value of the policy in the stock market." While that is certainly an option, Clark says that strategy doesn't "guarantee returns," whereas a life insurance policy that "is not indexed or stock based" will.
If you're not a life insurance guru, this information can leave your head spinning (which only adds to pregnancy nausea). Like any major purchase, there are caveats to every life insurance "rule" as well as ways to customize a policy to better suit your needs. But, in order to make informed decisions, you have to start by knowing the basics.
1. The Different Types Of Life Insurance Policies
Raymer notes that there are variations when it comes to the type of life insurance policy you choose, but for the sake of simplicity, the two primary policy types are Term and Permanent.
Term insurance is a policy that will pay out benefits if the insured person's death occurs while the policy is active, or during its term. Clark says these policies are generally good for 10, 20, or 30 years. Term life insurance typically has a lower monthly premium cost, but Raymer warns that they don't "build any equity." So, if you pass away during your policy's term, your family will receive the full benefit. However, if you don't pass away during the term, the policy simply ends and all the money you put into it is gone.
Permanent life insurance, however, covers you for your entire life. This type of policy tends to be more expensive, but Clark notes they will always return premiums paid "either in the form of cash value accumulation or death benefit" because they build equity. This means that, unlike term life insurance, every dollar you pay into the policy is still owned by you.
2. Your Reason 'Why'
It's tempting to look at the monthly cost of life insurance and brush it aside (especially since daycare is about to take a big chunk of your budget), but in doing that you're missing the big picture. That budget you're being so meticulous about is the very reason to invest in life insurance. As Raymer puts it, "Parents carry a lot of [financial] responsibility. Mortgage, car loans, student debt, children's education, sports, music, and just plain providing for the family." You need to consider whether or not your partner can cover those costs if you aren't around.
As a general rule, Clark says that adults should buy life insurance for three reasons: to cover debt, to provide for your family in case of your death, and to "leave a legacy." For new parents, the first two are key. Life insurance will allow your family to pay off any outstanding debts (such as the house, so they won't have to worry about paying a mortgage on only one income) and have cushion to pay for your funeral, any lingering health bills, and maintain life as normally as possible.
3. Age & Health Determine Your Rates
Imagine you are an insurance carrier, and someone is asking you to agree to pay out $1 million upon their death, as long as they pay you a fraction of that amount every month while they are alive. If that person is young and healthy, it's pretty low risk and chances are good you won't be paying out that million bucks any time soon, which gives them ample time to pay in enough money to cover the benefit. However, if the person is older, has a serious health condition, or is generally unhealthy, the risk of death (and benefit payout) is higher, so you're going to want them to pay a larger fraction of that payout to you every month.
This is why it's important to get a policy sooner rather than later. Even if you're in perfect health, every passing year raises your risk. Raymer notes that it's important for parents to understand that "life insurance requires an application and often a premium deposit" before it's even evaluated by a carrier. After that, he says the carrier will review the application and will request follow-up information "including, but not limited to, health questions, physical exam, medical records, etc." Once they have all the information they need, the carrier will determine if you are insurable, and, if so, what your premium cost will be. The healthier you are, the lower the premium.
4. How To Determine The Amount Of Coverage You Need
Determining how much money you want to leave your family is, unfortunately, not cut and dry. However, there are some things to consider that will help you come up with a reasonable number. Raymer's general rule of thumb is to ensure every policy "is affordable for the family to maintain" and, at a minimum, has enough coverage to "handle the immediate need for cash" for the family (such as funeral costs, initial lost wages, etc.).
Beyond that, if you have a little more wiggle room financially, you want to increase the benefit as much as you can to cover additional costs for the family. These costs, according to Clark, may include "debt, lifestyle, [lost] future earnings, and family goals." When calculating this number, the good news is that you don't have to account for taxes, because Raymer says "the life insurance benefit is typically income tax free when premiums are paid with after-tax dollars." However, you should consider inflation and how much of the lump sum will likely be left over once debts are paid off.
5. The Benefits Of Covering Your Children
Clark and Raymer also advise you to consider purchasing a permanent policy to cover your child. Thankfully, this has less to do with a death benefit and more to do with cost, protection, and financial benefits. In fact, Raymer notes, "the majority of children don't die, they grow into young adults, so the need [for life insurance] is minimal."
While, yes, a policy for your child does provide you a safety net in the event of a tragedy, Clark points out that it also "protects the insurability" of your child. He says, if at some point down the road your child "were to be diagnosed with a serious illness or disease" they could become uninsurable, meaning "they may never be able to buy life insurance" for themselves, but they would still have the permanent policy you purchased on their behalf. Additionally, permanent policies build cash value/equity. So, if the child is able to take out their own policy when they're older, you can, at that point, cash out the policy for as much money as you've paid in or sign it over to your child so they can either cash it out for themselves or maintain it as extra coverage with very little cost.
Life insurance is definitely complicated, but it's worth the time it takes to wrap your head around it. Raymer encourages parents to get the ball rolling, because even if you can only do a little right now, it's better to get some life insurance than none at all. Both experts also urge new parents to find an agent and carrier they trust to walk them through the process and provide tailored guidance. No matter what, having at least basic knowledge will help you tremendously as you weigh your options and determine your direction.
Scott Clark, MBA, Marketing Representative at Federated Insurance
Scott Raymer, LUTCF, a North Carolina Licensed Insurance Agent with 30+ years of experience