November 30, 2018 12:00 PM PT

A New Parent's Guide to Life Insurance

Read more about Life Insurance

You want to do everything possible for your child. This includes long-term financial protection. Getting the right life insurance policy can ensure your family's future.

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A life insurance policy is an easy way to make sure your family is financially protected should something ever happen to you. Consider this:

The cost of raising a child from day of birth to age 17 has increased to $233,610, according to the U.S. Department of Agriculture. And that estimate includes only basics like food, housing, transportation, healthcare, and clothing (more on that below).

This guide covers all your important questions about life insurance as a new parent, including:

How does life insurance work?

Simply put, life insurance pays money to a designated beneficiary - like your spouse or child - if you were to pass away. The payout, called a death benefit, can be used towards a variety of expenses, like:

  • Funeral costs
  • Outstanding debts
  • Medical bills
  • Child care services

and more.

That death benefit will total whatever your policy coverage is. In other words, if you have a $600,000 policy, the payout will be $600,000.

Tip: Name a beneficiary right away when purchasing a policy. That way, there is no question who receives the payout.

Do I really need life insurance?

Remember the estimated cost of raising a child through age 17? That $233,610 doesn't include college savings or tuition, vehicles, vacations, sports or music lessons or any other "just because" expenses.

So deciding whether or not you need life insurance comes down to two questions:

  1. Does anyone rely on me for financial support? This would include your children, your spouse or partner, co-signors of debt or loans you have in your name, or parents you may eventually have to care for.

  2. Do I have enough money in my savings to provide that support? If someone does rely on you for financial support but you do not currently have enough savings to provide it, chances are you need life insurance coverage.

Do both parents need coverage?

Yes, both parents should have coverage, even if one is a stay-at-home parent. Though that parent may not be bringing home a paycheck, they are still providing valuable services that would cost money if you had to pay someone else to do them.

In fact, Salary.com reports that if a stay-at-home parent were compensated, they would earn nearly $115,000 per year. Some of the services they provide include:

  • Cooking: To hire a personal chef to take care of the cooking and meal prep, you're looking at $200 - $300 per week for five meals for a family of four (not counting cost of groceries). That's $11,200 - 16,800 per year.

  • Cleaning: The national average cost to hire a housekeeper is $160 per session (or anywhere between $8 and $17 per hour). That's likely around $320 per month, or nearly $4,000 per year.

    If you have small children, you'll probably have to hire a cleaner more than twice per month, doubling or even tripling the annual cost.

  • Child care: One in three families spends 20 percent or more of their annual household income on child care. The average weekly cost of child care at a day care center is about $200, according to Care.com. For just one year, you could pay $10,000 or more for just one child.

    They also handle laundry, carpool, and run errands like grocery shopping, just to name a few examples. The loss of income it would take to replace these services can add up quickly.

What are the types of life insurance?

You can purchase two primary types of life insurance: term life and whole (or permanent) life.

  • Term life insurance provides coverage for a certain period of time, or "term." This type of insurance policy is designed to protect your dependents should you die prematurely.

    With this policy, your beneficiaries receive the full payout only IF you die within the term. The most common terms are 10, 20 and 30 years.

    Term life insurance is usually cheaper because it's temporary. In fact, most term policies don't end up paying the death benefit because the majority of policyholders live through the end of the term.

  • Whole life insurance provides lifelong coverage and includes an investment and cash value component.

    The three main benefits to a whole life insurance policy are:

    1. Guaranteed cash value growth Since this type of policy typically involves investing dollars, the cash value account will grow over time.

      You can normally access the cash value any time through withdrawals or loans, which you can use for retirement, emergency funds, or other bills.

      Withdrawals often come with a fee or other contingencies, so you'll want to be sure you're familiar with your policy.

    2. Guaranteed death benefit The death benefit is a stated amount of proceeds paid to your beneficiary upon your death.

    3. Guaranteed level premiums for life Whole life insurance premiums are higher because the policy lasts forever and has cash value.

      However, the premium will not increase or decrease throughout your life, so it's easy to budget for.

Now that you understand what each type of policy entails, keep reading to see which policy is right for you.

What type of coverage do I need?

You'll want to choose a term life policy if:

  • You only need life insurance to replace your income over a certain period, such as the years you're raising your children or have an outstanding mortgage.

  • You want a simpler, more affordable policy.

Choose a whole life insurance policy if:

  • You want to provide money to your heirs to pay estate taxes.
  • You have lifelong dependents, such as a child with special needs.
  • You want to spend your retirement savings but still leave an inheritance for your beneficiaries.

How much coverage should I have?

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Ask yourself this: If you died, could your partner handle all of the child and life-related expenses?

In the most basic terms, your policy should be able provide the financial support that you no longer can, both now and in your child's future.

Here are both a simple and in-depth way of calculating the right amount of coverage for you.

Tip: You may want to create an Excel sheet or Google Doc to keep track of your totals. Both parents should answer all of the outlined questions below, when applicable.

SIMPLE

  • Consider how many years would you like coverage. Then multiply your annual income by that number of years. For example, if you want a 10-year term policy and earn $60,000 per year, you'll want a minimum $600,000 policy.

  • Think about other financial obligations you want your policy to cover. Aside from the costs of raising a child, this may include:

    • Funeral costs
    • Mortgages
    • Student loans
    • Credit card debt
    • Medical bills

    Add these totals to the sum found in Part 1.

  • Determine what services you provide that have a replaceable cost. This is particularly important if you are a stay-at-home parent. Your partner wouldn't be able to quit their job to provide the services you do (listed above).

    Add the replacement cost to Parts 1 and 2.

  • Do you have any savings or life insurance through a current employer? You'll want to subtract those totals from your determined policy amount.

    Most places of employment offer a life insurance policy when you are employed full-time. While you should participate in those policy offerings, most employers provide only 1-3 times your current salary.

    It's likely the coverage isn't enough for what you'll need. Also, if you leave that job, you lose the coverage.

Use this chart as an example of calculating Parts 1-4 above to estimate your life insurance coverage total.

Part 1 Annual income: $65,000 10-year term: $780,000
Part 2 Funeral cost: $10,000
Mortgage: $300,000 still owed
Student loan: $20,000
Credit card debt: $0
Medical bills: $5,000 Total: $335,000
Part 3 Child care: $11,000 per year Total: $11,000
Part 4 Savings: $15,000
Employer life insurance: $330,000 Total: $345,000

The sum of Parts 1-3 (replacing annual income and covering expenses) is $1,191,000.

Subtract your employer life insurance and savings for a total of $846,000. Therefore, you may want to opt for a life insurance policy totaling $850,000 - $1 million for adequate coverage.

Tip: Search the web to find a life insurance calculators. These will ask you questions and calculate numbers to give you a good estimate of how much coverage you may need.

IN-DEPTH

List your current income and expenses. One of the main uses for a life insurance policy is replacing a parent's income. You need to know exactly what that sum is, how much of it is spent on monthly expenses, and how much remains.

  1. Start with your monthly take-home pay (after taxes and other payroll deductions). This should be calculated for both parents and added together.

  2. Then, add up all of your monthly expenses. These can include:

    • Household expenses: mortgage/rent, taxes, maintenance, utilities, electric, internet, cable, average grocery cost, etc.

    • Personal expenses: clothing, personal care, pets, education, medical expenses, etc.

    • Children: child care/babysitting, clothes, school expenses, etc.

    • Transportation: gas, maintenance, parking fees, etc.

    • Debt: student loan, credit card, auto loan, etc.

    • Other: restaurants, entertainment, traveling, subscriptions, gifts, electronics, etc.

    You likely have insurance (health/dental/vision), 401(k), disability and life insurance taken out of your paycheck. Be aware of how much that totals each pay period.

If you are a stay-at-home parent, you should include these expenses in your total monthly expenses outlined above - you'll likely have to pay for those if your partner dies.

Parent 1 Monthly take-home pay $3,000
Parent 2 Monthly take-home pay $4,500
Household expenses Mortgage: $1,500
Utilities/electric: $600
Internet: $50
Cable: $50
Groceries: $250

Personal expenses Personal care: $100
Pets: $50
Medical expenses: $20 (prescriptions) Personal care: $50

Children Baby-related expenses: $1,000

Transportation Gas: $100
Parking fee: $25 Gas: $60
Parking fee: $50
Debt payments Student loan: $500
Car payment: $250
Credit card: $1,000 Student loan: $800
Car payment: $500
Other Cell phone bill: $150 Entertainment: $200
TOTAL (both parents): EXPENSES: $7,305 TAKE HOME PAY: $7,500

Project what your income change would be if either parent dies. By calculating the change in your income and monthly spending should a parent die, you get an idea of the potential gap in income.

You'll want to take your total expenses found in Part 1 and subtract one parent's income, keeping in mind that:

  • You may have to adjust your contributions to your 401(k) - up or down - based on your changed needs.

  • You might be newly enrolling in a health insurance plan or switching to a different plan. This may increase or decrease monthly health insurance costs.
  • Your tax deductions may change based on a change in income or addition of dependents and federal allowances.

Understanding the difference of 2 vs. 1 incomes calculated in Part 1 will help you realize the difficulties in affording those expenses should one parent die.

Determine how many years of income you'll need to replace. As a new parent, you'll likely be supporting your child for the next 17 years - or at least $234,000 out of pocket.

If you have other children before passing away, you can multiply that sum for as many children as you have.

You won't opt for a policy term that will support them for the full 17 years. But you may decide you want to plan for five or 10 years of support to give the surviving parent time to grieve and get back on their feet.

You may want to estimate for an even longer period of time depending on the ability of your partner to make up the gap in income.

Consider how your spending will change

If one parent dies, there is increased financial burden placed on the surviving partner. While it's difficult to exactly calculate these changes, there are a few significant cost changes worth considering.

For example, you'll need child care if the surviving parent has to continue working full-time. Or if the parent becomes or continues to be a stay-at-home parent, there will be an additional cost for health insurance.

Determine how long a life insurance policy will be able to support your family and these additional spending changes.

Outline your debts:
You should total any debts you currently have, including:

  • Student loans
  • Credit card debt
  • Mortgage
  • Auto loans
  • Other money you owe

Once you know the total balance of debt for both parents, consider how much of that debt you'd need your life insurance policy to pay off.

Determine lump sum needs and wants:
This is where you would think about and list additional expenses you want to cover with your policy:

  • Do you want to pay off most or all of your debts?
  • How much do you want to contribute to end-of-life costs, like a funeral and medical bills?
  • Do you want to leave an amount to your children for college education? How much?

    FYI: The average cost of tuition per year:

    $34,740 for private colleges
    $9,970 for in-state residents at public colleges
    $25,620 for out-of-state residents at public college

  • Do you want to contribute dollars to future new cars, houses, weddings or other large expenses?

Determine what could be covered by Social Security:
You may not know that some of your life insurance needs may be covered by Social Security.

The same taxes that provide coverage for retirement or disability also provide a life insurance policy that is provided by the SS Survivors Benefit.

To find out what is provided and how much, start by pulling your Social Security statement from the SSA website. Look at the "Survivors" section.

The three numbers there represent the three benefits your family could be eligible for.

  • Your child: this monthly amount would be paid out to each child who is unmarried and under the age of 18.
  • Your spouse: this monthly amount would be paid to your spouse as long as he/she remains unmarried and still has dependent children under age 16.
  • Total family benefits: this monthly amount is what would be paid out across all eligible recipients.

By adding these three numbers together, multiplied by 12 (months in a year), you can estimate the annual SS contribution.

Depending on how many years your family could expect to receive these benefits, you may want to subtract this total from your coverage needs.

Add any savings available to cover your needs:
Calculate any savings you currently have set aside for monthly expenses. This should be subtracted from your coverage estimate total.

Or don't include it in your life insurance considerations and designate the dollars to something else.

Review final life insurance needs:
Knowing both parents' current monthly incomes - minus monthly expenses and debts - gives you an idea of how you look financially with both parents in the picture.

Now, subtract one parent's income and add in additional expenses, like child care, that would be taken into consideration should one parent die.

This gives you the gap in income that would need to be covered in the event of your passing. Multiply this gap by 12 to give you an annual sum.

Monthly Income Parent 1: $3,000
Monthly Income Parent 2: $4,500
Monthly Expenses: $7,305
Additional Monthly Expenses after death: $2,000

Parent 1 Dies: $4,500 - $9,305 = -$2,805 income gap
Annual Gap: -$33,660 minimum

Parent 2 Dies: $3,000 - $9,305 = -$6,305
Annual Gap: -$75,660 minimum

You should also add in total lump sum needs and wants for your children, like a wedding or college tuition savings.

Wedding: $20,000
College tuition: $30,000
New Car: $5,000
Other: $10,000
TOTAL: $65,000

Once you have a total gap in income and expenses, subtract your additional savings and what would be paid by Social Security, if applicable.

Savings: $10,000

This should give you an idea of how much you'll need covered for one year. Multiply this number by the total number of years you want to provide financial support.

You may find this equals $500,000 - $1 million or more. This is not an uncommon number.

Parent 1 Dies
Annual Gap: -$33,660 minimum
Additional needs: $65,000
Savings: $10,000
Coverage needs: 15 years
Coverage minimum: $559,900

Parent 2 Dies
Annual Gap: -$75,660 minimum
Additional needs: $65,000
Savings: $10,000
Coverage needs: 15 years
Coverage minimum: $1,189,900

Don't be overwhelmed by all of the different considerations and analysis. Again, doing a quick internet search will provide several options for life insurance calculators. They will ask you basic questions and put together an analysis of your life insurance needs.

Tip: Talking to a life insurance agent is a good place to start. Their job is to ask the questions and gather the information necessary to calculate your specific policy coverage and needs.

How much is a life insurance policy going to cost me?

A number of factors affect your monthly premium. (Typically, these premiums increase the older and unhealthier you are.)

  • Age: The younger you are, the less you are going to pay.
  • Sex: Typically women pay less than men.
  • Health: The healthier you are, the less you'll pay.
  • Smoking habits: Smokers will pay more than non-smokers.
  • Hobbies: If you have riskier hobbies or occupation, you'll likely pay more for coverage.

Your premiums will be higher if you have pre-existing health conditions that can affect you mortality rate, like:

  • Heart disease
  • Cancer
  • Diabetes

These conditions present a higher chance you will not live to the end of your policy term; therefore, you wouldn't pay the full amount of the policy before death.

How do I purchase life insurance?

Once you estimate how much coverage you want and for how long, you will have to actually purchase a policy. Here are the steps:

  1. Prepare and do your research. Think about the questions listed above. Consider what the policy coverage is to pay for and how much coverage you'll need. Also decide what type of policy you want (term or whole).

  2. Get a quote. You can get free, no-obligation quotes online (just search for "free life insurance quote") to get an idea of what you'll be paying monthly. You may want to get several quotes from different companies to find the best deal.

  3. Purchase your coverage. There are three main ways you can purchase coverage:

    • Directly from an insurance company. While this route typically ensures buying from a large, reputable insurer, it also may not get you the best price.
    • Through an independent local insurance agent. These agents generally represent multiple companies. They are able to compare more prices and often get you a better quote.
    • Through an independent online broker. Purchasing online may seem faster and easier. But keep in mind life insurance policies and costs can be confusing, so it may be more difficult to do it on your own.

Tip: When shopping for a policy, consider these questions:

  • Is the application easy? Free time is something you don't have a lot of. Make sure that completing the application is something that's feasible for you.

  • Does the company/agent have a good financial rating? Once you narrow down a few quotes or purchase options, do an internet search to learn their ratings and reviews from customers.

  • Are these the best options available? Just because the company or agent offers you multiple options doesn't mean they are the best options for you. The most important part is finding the coverage that fits you and your family's needs.

  • What is my gut telling me? If you think you need a 20-year term but your agent suggests 15, go with your gut. You know better than anyone what coverage and financial support you want and need for your family - don't let anyone convince you otherwise.

What is the application process?

Once you decide how you are going to purchase your policy, it's time to get a quote, choose a policy and actually apply. This process can take several weeks because it's quite lengthy - and personal.

Here are the steps:

  1. Speak with an agent to verify information you provided during the quoting process.

    You'll also answer additional questions about your needs and confirm that the quote you selected is best for you. You'll usually be sent paperwork that you have to fill out and sign to verify your intent.

  2. (Possibly) see a doctor. Many insurance companies require a medical exam to verify the information you gave about your health is accurate.

    The doctor will:

    • Record your medical history
    • Take blood pressure
    • Do a simple blood test to test for diseases, drug use, cholesterol and glucose levels, etc.

    Once complete, the information will be sent to the insurer. They will analyze the results and decide whether to insure you or not, as well as what to charge as your monthly premium.

  3. Sign your policy. When your policy is approved, you'll be notified and sent a full copy. Typically you'll also be asked to make the first premium payment.

    Tip: Review your policy in detail before signing the final papers. Understand the renewal details, year-to-year variances, benefits and fine print for policy dollar allocation and interest on the policy.

Bottom Line

Life insurance can be complicated. With a growing family, you might feel especially overwhelmed.

But with the right coverage and protection, a life insurance policy ensures your children are properly provided for in the event of your death.

You should review your policy every few years to make sure it's still the right coverage and amount. Things that might change your needs include purchasing a house, getting married or having another baby.

Doing your research, knowing your numbers, and talking to a life insurance agent can all help ensure you get the policy coverage that best suits you and your family.

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