Becoming a new parent is a huge milestone, not to mention a daunting and unique privilege. As you begin this new chapter in your life, it’s natural to feel a strong desire to protect your family. One way of doing this is with life insurance, as it can provide financial protection for the growing family should one or both parents pass. Learn more about how life insurance works for new parents and explore your options.
Table of Contents
Why Life Insurance Is Important for New Parents
Life insurance can can act as a way to set up replacement income for your loved ones if you pass away, allowing your beneficiaries to settle your outstanding debts, help pay for your funeral expenses, and maintain their current lifestyle.
Life insurance is a contract where the insurer agrees to pay a beneficiary a set amount of money if the policyholder dies within the policy’s term. For term life insurance, this is typically between 10 to 30 years from the start of the policy and can usually be renewed for continued coverage. For permanent life insurance, this can last for the remainder of the policyholder’s life, as long as the policy’s premiums are paid. Other events, such as terminal disease or critical illness, can also result in payment depending on the terms of the policy.
As a new parent, your dependent child would rely on your income making life insurance a valuable way to help protect their upbringing in the event of your death. Those raising a child with a partner should consider each purchasing individual life insurance policies to ensure that the family is protected should either parent pass.
How Does Life Insurance Work?
If you die within your life insurance policy’s term, the insurance company pays a death benefit to the beneficiaries on your policy. There are no restrictions on how the beneficiaries can use the money they get from the death benefit.
For example, the death benefit can cover:
- Funding a child’s education
- Final expenses, such as burial costs
- Medical bills
- Settling your estate
Depending the in insuring company, there may be no restrictions on the number of beneficiaries or who you may name as your beneficiaries. However, if naming a minor as your beneficiary, you may need to also name a guardian or trust to handle the death benefit until the minor comes of age.
When Should New Parents Purchase Life Insurance?
It’s never too early to purchase life insurance, and you can buy a policy even before your child is born or adopted. Purchasing your life insurance policy earlier can also give you a financial advantage because life insurance tends to become more expensive as you age.
For parents specifically, it’s best to purchase life insurance when:
- You’re newly pregnant or planning to get pregnant.
- You’re adopting a child or having one through other means.
- You’re planning to have or adopt children in the next 5 to 10 years.
Newly Pregnant or Planning to Become Pregnant
It’s possible to get life insurance while pregnant, but there are some caveats that you may want to keep in mind:
- Medical complications can result in higher premium rates.
- You can save money if you purchase life insurance before pregnancy because that helps premiums remain as low as possible.
- If you’ve recently given birth, insurers may opt to put the application on hold until a few months after birth.
Considering these potential issues, it’s best to get life insurance before you get pregnant. Not only can it support your child if you pass away later in life, but if there are complications during birth that result in your death, your beneficiaries will receive a death benefit.
Adopting a Child or Having a Child Through Other Means
Parents who are adopting or planning to do so — or are having a child through a surrogate or gestational carrier process — could benefit from purchasing life insurance beforehand. The insurance process can take time, so getting the process started earlier can ensure the child is financially protected from the moment they join the family. In addition, some states require adoptive parents to have an active life insurance policy.
If You’re Planning for Children in the Next 5 to 10 Years
If you’re planning to bring a child into the family in general within the next 5 to 10 years, it’s a good idea to apply for life insurance as soon as possible. Health issues typically arise more frequently as people age, and these could increase your premium. Including life insurance into your family planning process early on could help you receive a more favorable premium for your coverage.
What Life Insurance Is Best for New Parents?
There are different types of life insurance, but the two main categories are term life and permanent life insurance.
Term Life Insurance
Term life insurance policies typically have lengths of 10, 20, or 30 years, and unlike permanent life insurance, the death benefit is only paid out if the policyholder dies within the active term. If you outlive your term life insurance policy, your policy would either renew at a higher rate or end altogether, leaving you without coverage. Neither you nor your beneficiaries would receive a death benefit. You may also convert your policy to a permanent policy if eligible or change to an entirely new term or permanent life policy.
Because of the limitations on policy length and lack of other features, term life insurance is more affordable than permanent policies. This makes it a potentially good choice for new parents who may not be able to afford a permanent life insurance policy. For example, younger parents may have a tighter budget because they are new in their careers or have a large mortgage from buying their first home. Term life insurance could be a more affordable way to ensure financial protection until their mortgage is paid off or salaries increase with time and experience, at which time they may be able to afford changing to a permanent life insurance policy.
Permanent Life Insurance
Whole life and universal life are the two main types of permanent life insurance, and the majority of this kind of coverage combines a death benefit with a savings component. Permanent life insurance policies have a guaranteed death benefit because unlike term insurance, coverage lasts for the policyholder’s entire lifetime unless it lapses due to nonpayment or underpayment of premiums.
The premiums for permanent life insurance support both the policy’s death benefit and its ability to accrue cash value. This cash value functions as a living benefit, or a feature that can be accessed while the policyholder is still alive. If there is enough cash value accrued, policyholders can typically use it however they see fit, such as to help fund a child’s education or cover medical costs. Because of its lifelong coverage and cash value features, permanent life insurance tends to come with a higher price tag than term life insurance.
But For many new parents the extra expense is worth the investment as it provides reliable coverage and value growth.
How Much Life Insurance Should New Parents Purchase?
As a new parent, there are several factors to consider as you figure out how much life insurance you need to purchase, including:
- The amount of money it would take to pay off your debts, such as car loans or mortgages, if you were to suddenly pass away
- How much your dependents will need to maintain their lifestyles if you pass away during the policy period
- Financial needs that a life insurance policy could help pay for, such as your children’s college education
Insurers will use these factors to help you calculate your coverage needs. Common calculation methods include multiplying your income by 10 to simulate 10 years worth of your income as the death benefit, or the DIME method, which factors in your debt, projected income, mortgage balance, and education costs for your children.
Should New Parents Purchase Life Insurance for Their Children?
New parents do not necessarily need to purchase life insurance policies for their children. However, many people find this may be the best time to do so as it will lock in coverage for your child at a very affordable rate. If you’d like to give your child life insurance coverage on your policy, you might consider adding a child rider. This is an add-on you can purchase to secure a death benefit if your child dies, which can help cover funeral expenses for their burial. For many parents, this may be a less costly option than purchasing a separate life insurance policy for their child.