5 Things You Need to Know About Life Insurance As a New Parent:
New parents are notoriously busy and tired, adjusting to a new baby in the house. You have probably not had a minute to yourself since your baby came home.
Consider this article a gentle reminder that you need to provide for your child if something happens to you. This article gives you five valuable tips to help you select the right insurance, the right beneficiary, and the right amount of coverage for your family.
#1: Purchase Term Life Insurance, Not Whole Life Insurance
Term life insurance is the kind of life insurance most people think of when they think of life insurance. The insured purchases insurance coverage for a set amount of years called the “term,” and pays monthly premiums to maintain it. If the insured dies within the term, their named beneficiary or beneficiaries received the death benefit. If the insured outlives the term the policy expires, with no payout.
In contrast, whole life insurance accrues present cash value and is invested according to the insured’s risk tolerance. The insured can borrow against the policy or lend from it. This type of insurance, also called “permanent” or “universal” life insurance, is typically purchased by high-worth individuals who have fully funded their other retirement accounts and are looking for somewhere else to put their money.
#2: You Must Ensure Your Income Stream
Every family unit is different. Identifying the person or people who must have life insurance coverage is dependent upon the financial situation of your family. Who is the primary breadwinner?
- If you are a single parent and the other parent is not on the scene, you are the primary breadwinner, and you must have life insurance coverage.
- If you live and co-parent with the baby’s other parent, whoever makes the most money is the primary breadwinner and must be insured.
- If you live and co-parent with the baby’s other parent and you are providing child care, you both must be insured, to cover both your family’s income stream and what the remaining parent must pay in child care should something happen to you.
- If you are single and the baby’s other parent is paying support, the other parent is the primary breadwinner.
#3: You Can Ladder Policies to Save Money in Premiums
First, how do you calculate how much coverage you need? You add up your current and anticipated expenses and multiply it by the number of years you will have those expenses.
For example, let’s say your partner is the primary breadwinner, and you work part-time but care for your child at home. First, your time spent caring for your child has monetary value in that your partner must pay someone to do it if you cannot. Second, consider the expenses of raising a child, and know that for the first ten or fifteen years after you bring your baby home, your expenses will grow slightly as the child ages and participates in activities. If you anticipate having another child, double those expenses and add a year or two.
When your first child reaches age 18, you need to provide for continuing education and living expenses. If you have another child or more children, add on those years and multiply the amounts.
Once your children are grown and have left the house, then your partner should be insured in an amount that will supplement your income and pay for funeral and other end-of-life expenses.
Let’s say you’ve taken all of this into account and you’ve determined that you need $750,000 in coverage in your family’s early years. Do not go out and purchase a 30-year $750,000 policy. Those premiums will be very high and you will pay them every month for thirty years!
You will not need that amount of coverage 29 years from now, because your children will have grown. You will not even need it 19 years from now, because your children will be over age 18 and in college. Here’s what a life insurance ladder could look like for your family:
- 1st Policy – $350,000 coverage for a 10-year term
- 2nd Policy – $250,000 coverage for a 20-year term
- 3rd Policy – $150,000 coverage for a 30-year term
By laddering three policies, you have $750,000 total coverage for the first ten years of your young family’s life. Then the most expensive policy expires, you are only paying premiums on the second and third policies, and you have $400,000 coverage for the next ten years while your children become teens and young adults. Then the second policy expires, and for another ten years, you maintain $150,000 in coverage.
#4: You Must Not Name Your Minor Child as the Beneficiary to Your Life Insurance Policy
A minor child cannot legally receive death benefits. If you name your child as the beneficiary to your life insurance policy and you die, a court-ordered guardian will be appointed to care for your child and your child’s money.
#5: Create a Trust for Minor Children or Children with Special Needs
Surely you would prefer to decide who will care for your child yourself? You can do that, with a trust. Visit an estate-planning attorney to create a trust with your selected guardian as trustee. Then name the trust as the beneficiary to your life insurance policy, and if you die, the trust gets the death benefit and the guardian of your choosing administers the trust and cares for your child.
These five tips should help you determine what your family’s life insurance needs are now and in the future. Use these tips sooner rather than later, so you can have peace of mind knowing that your family is taken care of should the worst happen.
About the Author
Veronica Baxter is a blogger and legal assistant living and working in the great city of Philadelphia. She frequently works with Chad Boonswang, Esq., a national life insurance beneficiary lawyer.