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Dealing with your finances may not be the first thing that pops to mind when you’re preparing for a baby or just settling in at home with a brand-new bundle of joy. Indeed, life insurance isn’t the most comfortable subject, especially for new parents who have a baby depending on them every step of the way. And, of course, this is the one policy in your life that you hope never "pays off."
But learning about the options and securing a solid life insurance policy is one of the most important things you need to do to plan for — and protect — your child’s future. Here’s what you need to know to get a plan that’s right for you.
Who needs life insurance?
With a new baby comes new expenses — child care and the future cost of college being two of the largest. If you’re investigating setting up a college fund, you’re one step ahead!
But consider the time between your child’s birth and his or her early-adult independence. In those 18 or so years, if you or your child’s other parent should pass away, the surviving parent would have to cover all those expenses on his or her income alone.
A life insurance policy — which only requires a bit of research and paperwork — will help the surviving parent pay someone for extra help with child care, cleaning, cooking, transportation, etc. And that means your family can continue living their lives without undue financial stress. Isn’t that the kind of long-term protection and security every parent wants?
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Do both parents need life insurance?
You bet. For the ultimate piece of mind, every parent should have life insurance.
Say you’re the primary breadwinner: How would your family make ends meet if you ever weren’t there to earn a paycheck?
But life insurance works both ways too. If you’re a stay-at-home parent, your working spouse will need to pay for childcare after your hypothetical passing. In fact, in a national survey, Salary.com found that the average salary for a stay-at-home mom (applies to stay-at-home dads too!) would be a whooping $184,820.
When's the best time to get life insurance?
It’s best to set up your plan while you’re still pregnant and have time to research your options thoroughly. But if you've already had your baby, don’t stress: The perfect time is now, while you’re thinking about it. Putting it off only ups the odds it’ll never get done.
How does life insurance actually work?
Once you cut through all the jargon, it’s pretty simple: You take out a policy and pay a monthly premium similar to auto or home insurance. In the event of your death, that policy provides whomever you designate as a beneficiary (your spouse, children or a trust) with a payout, usually a lump sum.
Your premium depends on a few factors, including your age, health, gender and how much coverage you want — or, in other words, how large of a payout you’d like to secure.
Which type of life insurance is best?
Life insurance breaks down into two major categories: term and whole (also called permanent) coverage.
Term life insurance
With term life insurance, you pay a premium to be covered for a specific amount of time.
This is often the best option for new parents. You can begin a 20-year term now and your policy covers you until your children will more than likely be living on their own. Once the term wraps up, your coverage expires and no benefits are given to you or your family.
Ultimately, for new parents who are looking for insurance to replace income in the event of a death, financial advisors most often recommend term life insurance. You can take the money you’d otherwise spend on permanent life insurance and invest it in an IRA, 401(k), a college savings 529 plan or other savings plan that will benefit your kids.
Whole life insurance
The other option is whole life insurance (aka permanent life insurance), which tends to be a little more complicated. Whole life insurance covers the individual permanently for the rest of his or her life. The policy can operate as a type of savings vehicle, which you can borrow against down the road.
Permanent life insurance is typically much more expensive. That’s because a good chunk of your payments are going toward expenses and fees. And should you, for some reason, be unable to pay these high annual premiums (say, a spell without a job), you’ll lose the insurance, all the money you paid into the plan and any “investment” returns you had planned to get from it.
Popular life insurance companies for parents
Prudential
As one of the largest life insurance companies in the U.S., Prudential is a popular choice for new parents. “Prudential uses highly specific underwriting guidelines in key areas, which is beneficial and cost-effective for certain applicants,” explains Brian McHale, an independent licensed insurance agent with Policy Mutual, which helps people compare insurance rates.
- Pros: Strong reputation, offer multiple term and permanent policies, helpful online resources provided
- Cons: Medical history is required, online quotes are not available for all policies
State Farm
State Farm offers a wide range of policies, including term, whole and universal life and also allows parents to expand their coverage without having to change it from one policy to another.
- Pros: Parents can add kids to existing policies, provides instant online quotes, great customer service
- Cons: Rates are higher than other companies for same coverage, if you opt out of medical exam, you have to fall within certain restrictions, plan changes can only be done through a live agent
Northwestern Mutual
The largest seller of individual life insurance in the U.S., Northwestern Mutual is mutually owned, meaning that they answer to policyholders instead of shareholders. That translates to financial decisions being made based on what’s best for clients in the long term, explains Michael Kane, an insurance specialist at Independent Capital Management, a financial planning firm.
- Pros: High customer ratings, offers wide selection of products
- Cons: Often has higher rates, policies can only be purchased through a salesperson, medical exam often required
Ladder
With Ladder, you can select your life insurance policy entirely online, making for a tech-savvy yet user-friendly process that overwhelmed new parents can appreciate.
- Pros: Consumer-friendly interface, policy changes can be made online, no medical exam required for most policies
- Cons: Doesn’t offer riders (add-ons to your existing policy), coverage not available for individuals over the age of 70
Transamerica
For more than a century, Transamerica has offered lots of life insurance and retirement plans with positive ratings. They provide multiple product options, and “their policies can be offered through independent agents and they have unique living benefits on their term insurance that can provide benefits in the event of illness, and not just death,” explains Kane.
- Pros: No medical exam required for certain policies, multiple policies offered, online quotes available
- Cons: Higher premiums on average for females, online quotes are not available
How much life insurance do you need?
The level of your policy (read: the payout your family would receive if you were to die) depends on a few factors. Think about covering funeral expenses, your income for a series of months — if not years — and even a sum to cover outstanding debt or future college tuition.
The folks at Life Happens, a nonprofit educational organization founded by insurance companies, recommend a policy that’s 10 to 15 times your salary as a starting point plus an additional $100,000 for your child’s college costs. You can calculate how much you might need with the site’s life insurance calculator.
How do you get life insurance?
Once you estimate how much coverage you’d like, reach out to an insurance agent — or shop around online — for a few quotes from different carriers. Ideally, look for spots like NerdWallet, an independent personal finance site, which allows you to browse options from multiple insurance companies.
You can also contact a financial adviser. Look for a fee-only adviser; they do not receive commission, so they’re more likely to be objective.
Many companies offer life insurance to their employees, but those policies often don’t offer the level of coverage parents need. Check the details of the policy, but remember that you won’t be able to retain this life insurance if you leave for another job.
How can you get the lowest possible rate?
Comparison shopping is a must, as is asking for level premiums (meaning the amount you owe each month won’t change over time).
And beyond that, remember that your health and habits may affect your premiums. Some insurance companies require a medical exam before you sign up and offer discounts for taking documented steps to improve your health, like quitting smoking or lowering cholesterol.
On the other hand, relatively dangerous hobbies (like rock climbing) might bump up your premium. Ask your agent or read the fine print to see if the policy you’re considering includes lifestyle discounts.
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