Life Changes and Life Insurance: Having a Baby
There may not be a more compelling reason to buy life insurance than having a baby. As is the case with being a parent, though, there's a lot to learn and consider.
Whether you've just had or adopted a baby or you're about to have or adopt one, one of the most important questions you have to ask yourself—as well as anyone who may help you raise your child—is: what would happen if I become sick, injured, or, worse, passed away?
A few related questions, all of which are important, too: who would pay the bills, including the rent or mortgage? Who would buy the food, chip away at the credit card balances and outstanding loans, or save for college?
For many families--or families-to-be, depending on the situation—buying life insurance helps answer these and similar questions.
That's because the point of life insurance is to replace some or all of your income and otherwise allow your loved ones to maintain their current lifestyle should something happen to you.
Specifically, life insurance can help your heirs:
- Cover funeral costs
- Pay off existing loans and debt, like credit cards or a mortgage
- Plan for the future by saving for college or retirement
- Afford the rest of their daily and living expenses
Which Type of Life Insurance Should You Buy?
The question is: which type of life insurance should you buy if your goal is to help your family with all of the above in the event of your premature death?
One option is whole life insurance, which also is sometimes referred to as permanent or "cash value" life insurance. The money you put into these policies—potentially for the remainder of your life--gains value over time, and you can borrow from that amount just as you can a 401(k), should the need arise. (Or you can leave it alone and let it be paid to your beneficiaries after you're gone.)
The other option available to you is term life insurance, which you pay into and are covered by for a more temporary or defined amount of time. For instance, rather than paying premiums for the rest of your life, with a term life policy you usually pay into it for a set period. This could be anywhere from one to 30 years or more. Although 10 or 20 years seem to be the most common.
Term life insurance is a lot like car or homeowners insurance, by the way, in that it only pays out if something happens to you while the policy is active (which is while you're still paying premiums). If the policy ends and nothing dire has happened, you—or, rather, your beneficiaries--receive no benefit.
(For more information about the differences between term and whole life insurance policies, read our article about the topic: Differences Between Term Life and Whole Life Insurance)
Why Should You Purchase Term Life Insurance?
Despite that potential pitfall, most new parents or parents-to-be are likely to find term life insurance to be a more appealing and advantageous investment than whole life insurance.
The main reason for that is term life premiums tend to be a lot cheaper than those associated with whole life policies. We're talking hundreds of dollars per year versus more than $1,000 per year. That's sure to please young families who have limited budgets or whose bank accounts are stretched thin.
Plus, even with the smaller investment, term life insurance policies provide a good amount of coverage (often $500,000 to $1,000,000 or more)—and provide it during a period of time when your children, as well as your spouse or partner, are most likely to need it.
Another positive aspect of term life insurance: once your need disappears—such as after your children graduate from college and they can begin to support themselves—you can stop paying for coverage you no longer need and use that money to save for other things, such as your retirement. Or, depending on the policy you purchase, you may choose to convert your term life insurance into a whole life insurance policy.
When Should You Buy a Life Insurance Policy?
The short and sweet answer to the question above is "as soon as you're able," but most of you probably are looking for a more detailed response than that. In that case, hopefully you'll be satisfied by the following:
The consensus seems to be that, if you or your partner are planning to have a baby (as opposed to adopting one), you either should buy life insurance early on in the pregnancy or wait until a few months after the birth has taken place.
Apparently the majority of providers won't sell you a policy within about two months of your due date, so it's best to get your insurance buying out of the way well in advance or take a rain check, so to speak, until the little bundle of joy has been welcomed into the world.
(All of the above should hold true if you're looking to adopt, by the way. Actually, the process should be even more straightforward, as you're unlikely to have limits placed on you as to when you can and can't take out a policy.)
Who Should Be Insured?
You may assume that, when it comes to families that are headed by two adults, only those who bring home the bacon (earn a salary) need to be insured.
That line of thinking makes sense on the surface, of course, as a loss of income due to the death of a working spouse, partner, or parent is sure to be financially devastating for almost any family.
Still, insuring only the breadwinner (or breadwinners, if both parents in the household bring home a salary) could leave your family unprepared, and underinsured, should something happen to the non-working parent.
After all, if you're the parent who effectively pays the bills and your stay-at-home partner or spouse passes away, you may have to cut your work hours or pay someone to help care for your kids or to assist you with cleaning, cooking, other household tasks, and even transportation.
And if you're a single parent? Investing in some sort of life insurance to ensure that each of the costs detailed above are covered is even more important.
How Much Life Insurance Should You Get?
Out of all the questions posed in this article so far, this is the most difficult to answer thanks to all of the unique variables a family has to take into account.
That said, the general rule of thumb seems to be to buy enough life insurance coverage to replace five to ten times your annual income—although you probably can lean toward the lower end of that scale if your household is made up of two working parents who earn similar salaries.
Aside from that, you may also want to compile and consider:
- How much your family currently spends each year on food, clothing, utilities, rent or mortgage payments, education, and the like
- How much your family is likely to spend on those things in the future (education costs may rise substantially, for instance, if one or more of your children go to college)
- How much money you have tucked away in savings and retirement accounts
- How much any of your other investments and assets are worth
- How much life insurance you already own
Are There Any Other Insurance Options You Should Consider, Too?
Actually, one fairly new and alternative form of life insurance you may want to keep in mind while you shop around is known as return-of-premium term life insurance.
As its name implies, this type of life insurance policy returns your payments if you nothing happens to you during its term. (If you're still alive when the term ends, to put it bluntly.) Even better: the amount sent back to you is tax-free.
The catch with this kind of term life insurance is that the premium payments attached to them can be up to three times higher than those for more traditional term policies.
Aside from life insurance, though, there are a couple of other kinds of insurance products you could consider buying alongside (or in the place of, although that wouldn't be advised) life insurance.
One of them is disability insurance, which promises to replace a percentage of your income should a debilitating illness or injury keep you from being able to work.
Many experts suggest disability insurance is even more important for parents of young children than life insurance. That's because you're more likely to become disabled during your peak earning years than you are to pass away during that same time frame.
Some good news here: your employer may offer this type of insurance through a group plan. If so, take advantage of it. Don't fret if you have to buy it on your own, though, as there are benefits to that, too—such as the fact that private disability insurance will continue to cover you and your family even if you switch jobs.
Note: you may be able to add a "disability waiver of premium" rider to your life insurance policy. In most cases, this will free you from having to pay your premiums if you become disabled and ensure your life insurance policy isn't terminated.
What About Mortgage Life Insurance?
Something called mortgage life insurance may pop up while you surf the web or talk to agents while searching for insurance products that will protect your young family. The main feature of this kind of policy is that it will pay off your mortgage if you pass away.
As attractive as that may sound, most experts suggest passing on it and relying on a term life insurance policy instead, as the latter will cost less, provide the same amount of coverage (if not more), and offer your loved ones more flexibility in terms of how to use your inheritance.
If you're expecting a baby, recently had a baby, or are already a parent but don't have a life insurance policy, compare rates on life insurance from top companies now, and learn how affordable it can be to protect your family.
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