Life Insurance 101 for Parents

Life Insurance 101 for New Parents

December 1, 2017

Life Insurance 101 for New Parents

Life Insurance 101 for New Parents
Life Insurance 101 for New Parents

When it comes to all the things you’re doing for your growing family, getting life insurance probably isn’t at the top of your list. But honestly? It should be. It’s one of the most valuable things you can do for them.

We know it’s a tough topic to think about. Talking about life insurance means, well, talking about death, and that’s not exactly fun times. But having life insurance is probably the biggest step you can take to make sure your loved ones are taken care of. So while getting a life insurance policy might not be as much fun as shopping for baby clothes, it will help you sleep better at night, even with a newborn.

So let’s break it down.

Who needs life insurance?

Life insurance is something every parent should consider having—whether your career is full-time parent, freelancer or CEO. Think of the value of all you do. Life insurance isn’t only about replacing a salary, it’s also about making sure your family is taken care of when you’re gone. Life insurance won’t replace you, but it will help your family financially during their time of grief.

What is life insurance?

Simply put: it’s an insurance policy that pays out money (called a death benefit) to your loved ones if you die. Most of the time, the payment to your beneficiaries—you choose them, as many or as few as you’d like—depends on how much your life insurance policy is for. In many cases, it’s fairly straightforward—for example, if your policy is for $300,000, your beneficiaries receive $300,000.

That money can be used to help your family with everything from funeral costs to everyday expenses, like rent or mortgage payments, childcare and bills. And depending on how much your policy is for, it can also help them financially in the longer term, for something like college tuition.

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What are the different types of life insurance?

When you go to get a life insurance policy, know there are two basic types: term and permanent.

Term life insurance is the most common and your least expensive option. It’s pretty simple—it’s a policy that provides a death benefit during the period of time you choose to pay for, such as 10, 20 or 30 years. Your premiums stay the same during that period, so you can budget without surprises. At the end of the term, you can let the policy lapse (meaning no life insurance) or get a new policy. Of course, with this kind of life insurance, you may pay the premiums for the entire “term” and not use it. But you know that means? You’re alive. So congrats!

This policy is often a good choice for families with young children or with less disposable income.

Permanent life insurance is just that. Permanent. The policy stays with you for your whole life (as long as you pay the premiums). It allows for more flexibility in terms of what the policy can do, and it usually comes with a higher premium than term. This type of insurance also differs in that it can build cash value along the way that will become part of your beneficiaries’ payment when you die. When you make your premium payment, part of that money goes toward covering the cost of your insurance and running your policy. The rest goes into a fund that grows at varying interest rates depending on what kind of permanent policy you have.

Know there are many ways to structure your life insurance policy. There are good online tools you can use to help make your decision, or talk to a financial professional about what will work for your family.

How much life insurance does my family need?

When determining how much coverage you will need, don’t just think in terms of salaries. Think holistically about what would happen if you or your partner (if you have one) died. (Also, each parent should have their own policy.) Again, it’s about the value of all you do. Things to consider:

  • Income: How much do you currently take home? One rule of thumb is to multiply your salary by between 7 and 10 to determine how much of a policy to take out. For example, if you make $50,000, you’d want to start with a policy between $350,000 and $500,000.
  • Debt: Factor in your mortgage or rent payments, car payments, student loans and/or credit card debt.
  • Child and household care: How much do you regularly spend doing childcare, housecleaning and taking kids places? If you’re a two-parent household, you’ll need to take into account how much each parent does on a daily basis. This is particularly key if one parent stays home with the kids. Don’t undervalue this work.
  • Education: Budget in what you think you’ll be spending on a four-year college for your kid(s). Think about educational costs before college, too, like tutoring or extracurricular activities
  • Expenses: All the things that keep the lights on.
  • Don’t skimp: If you can afford it, buy more than what you think you’ll need.

How much will life insurance cost?

We wish we could tell you life insurance will cost you x dollars a month for the rest of your life. But life insurance, like most other forms of insurance, doesn’t work that way. The cost depends on a lot of things, from the type of policy you choose and how much insurance you want to your age, gender and family history.

One thing to keep in mind: term life insurance probably costs less than you think. Typically, the younger and healthier you are, the less you’re going to pay for a policy. So it’s smart to get one sooner rather than later, particularly as your family grows. For example, a 30-year-old nonsmoking woman would pay around $250 a year for a $295,000 10-year term policy. That’s less than $1 a day.

Can I get life insurance while I’m pregnant?

You can! In fact, pregnancy is a great time to get a life insurance policy, since you’re already preparing for your growing family. Pregnancy-related factors typically aren’t a big driver of pricing or approval. Some insurance companies might ask about your pre-pregnancy weight, but otherwise, it’s fairly straightforward.

The tl;dr? Every parent should have life insurance. There are lots of options out there for you at various price points to fit your family’s needs. Term is less expensive and usually good for families starting out; permanent can be pricier and more like a financial investment. Do the math on your expenses and get as much coverage as you can afford.

And don’t be afraid to talk about it. Think of it as a way of telling your family you love them.

Now you can crowdfund your life insurance policy premiums for the first year by adding it to your Babylist registry. Learn more here.

Article sponsored by The Prudential Insurance Company of America, Newark, NJ.

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