What Parents Need to Know About Life Insurance
This is one financial to-do you don’t want to shrug off.
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Life insurance might be the last thing you want to think about when it comes to family planning. It’s never fun to consider the worst-case scenario, especially when you’re bringing new life into the world. But as any parent will agree, it pays to have a backup plan—whether that’s a change of clothes or a financial safety net.
“While it is hard enough to lose a parent or spouse, having adequate life insurance can help alleviate the financial stress on your loved ones by providing for everyday expenses, paying off the mortgage, and funding retirement and education,” says Alissa Krasner Maizes, a certified financial planner and founder of fee-only planning firm Amplify My Wealth.
While the concept is fairly simple, navigating the life insurance industry can be complex. Ahead, we break down how life insurance works, what type of policies are available, and general advice for shopping for the right insurance for your family.
What is life insurance?
A life insurance contract pays a predetermined sum of money, known as a death benefit, when the insured person passes away. The money goes to the policy beneficiary and is often received tax-free. There are no restrictions or guidelines on how the death benefit can be used.
As the policyholder, you’ll pay a monthly or annual premium to keep the life insurance policy in force. There’s often a discount for paying the premium once a year, but a monthly installment option can work better for some household budgets.
Key Differences Between Permanent and Term Life Insurance
There are two main types of life insurance: permanent and term. The easiest way to distinguish between the two is that permanent provides lifelong coverage and term lasts for a limited period of time.
The structure of term life insurance is pretty straightforward: You pick a term between 10 and 30 years, undergo a medical exam, and pay level premiums for the entirety of the term. If you, the insured, pass away during the term, the death benefit goes to your beneficiary. If you're still living when the term ends, the policy expires.
Permanent life insurance doesn’t expire, and part of the premium goes into an investment account managed by the insurance company that grows over time. Referred to as the cash value component of the policy, this pot of money can be tapped by the policyholder via a loan or withdrawal, per the policy terms. Since there’s a death benefit, a cash component, and no coverage expiration date, permanent life insurance is often much more expensive than term.
Here’s a brief overview of the main features of permanent vs. term life insurance:
Permanent life insurance | Term life insurance |
|---|---|
Types include whole, universal, variable, and variable universal | Types include convertible and group (offered as a workplace benefit) |
Part of the premium goes into an investment account that earns interest | No cash value accrues |
Death benefit may be flexible | Death benefit stays the same |
Coverage period lasts until death | Coverage period lasts until death or a certain number of years (typically maxes out at 30 years) |
Premiums are level in a whole life policy, but can increase or decrease in a universal life policy | Typically level premiums throughout the policy term |
How much does life insurance cost?
Life insurance premiums can range significantly depending on the type of policy; coverage amount; and the insured person’s gender, medical history, lifestyle habits, and age at the time of purchase. When you apply, you usually undergo a medical exam involving a physical and a blood test to determine insurability and rates. (There are policies available that don’t require a medical exam, but they’re often pricier.)
Coverage limits and policy type also affect what you’ll pay, but the earlier you buy life insurance, the cheaper it will generally be. “The healthiest version of you is always the most insurable version of you,” says Mollon-Williams.
Men and women can pay vastly different premiums for the same amount of life insurance coverage, thanks to women’s longer life expectancies. On average, women pay 24% less than men for life insurance, according to 2024 data from Policygenius. Smoking tobacco, having risky hobbies (like rock climbing), working a dangerous job like firefighting, or having certain health conditions or a family history of disease can all contribute to higher premiums.
A whole life policy for a 30-year-old female nonsmoker in good health with $500,000 in coverage costs $3,292 annually, on average, or $274 monthly, according to Nerdwallet. That’s nearly $260 more per month than a woman with the same health profile would pay for a term life policy with 20 years of coverage.
Don’t let your possible risk factors scare you off. Assuming you won’t be able to get affordable life insurance coverage and putting it off—or skipping it altogether—can be a mistake. You may just need to put in a little more effort to find the right insurer or design a policy that works for your budget and still meets your family’s needs.
“Rather than delay, speak to a fiduciary financial planner who does not sell life insurance,” says Maizes. This way you ensure that there’s no conflict of interest, and your advisor is putting your needs first. You can find qualified professionals through trusted databases like the National Association of Personal Financial Advisors or the Fee-Only Network.
Who needs life insurance?
Life insurance can be especially beneficial for families with young children, since they rely on their parents’ income for daily living.
In households with dual incomes and children, it can be smart for both parents to purchase separate life insurance policies. This way, neither partner is left without a safety net if the other passes away unexpectedly. If you can only afford coverage for one person, consider insuring the breadwinner so that the surviving partner will not experience a major income gap or immediate financial fallout.
How much life insurance do you need?
Whether you choose a permanent or term policy, you’ll have a say in the amount of coverage you get. A higher death benefit generally means a higher premium.
Deciding how much coverage you need depends on your personal circumstances, including whether you own a home or rent, if you have student loans or other debt, how many children you have, the status of your liquid savings, your annual household income, and whether your employer offers any group coverage. One general rule of thumb is to consider your annual income and multiply it by 10. So if you earn $100,000 per year, you’ll need a $1 million policy.
It’s best to consult a fiduciary financial advisor who specializes in insurance or estate planning for help calculating your coverage needs.
Life Insurance Terms to Know
Shopping for life insurance can be intimidating. Here’s some basic terminology to understand before starting the search.
Premium: The premium is the cost of maintaining a policy, usually expressed as an annual or monthly payment. In a term policy, premiums remain the same throughout the duration of the policy. Certain types of permanent life insurance, including universal policies, may have flexible premiums.
Policyholder: The policyholder, who may or may not be the insured person, pays the premiums to keep the policy active.
Death benefit: Also known as the coverage amount, it’s the sum of money that a life insurance company pays to a beneficiary upon the insured’s death. The death benefit is generally tax-free if received as a lump sum. If a beneficiary chooses to receive a death benefit as an annuity, the portion of the payments attributable to interest will be taxable.
Beneficiary: A primary beneficiary is the person or entity who receives the death benefit when the insured dies. A contingent beneficiary will receive the payout if the primary beneficiary is no longer living or can’t be found. Experts advise against naming a minor child a beneficiary of a life insurance policy because they can’t receive the money until they reach the age of majority, which can be as old as 21 in some states. A better option is to name a relative as beneficiary or set up a trust for the benefit of a child, and name the trust as beneficiary. You can update beneficiaries on a policy at any time.
Cash value: Permanent life insurance policies contain a separate, tax-deferred investment account. This cash value can be accessed via a loan or withdrawal, per the policy terms. Minimum and maximum interest rates are determined by the insurance company when the policy is purchased and may fluctuate.
Rider: A rider is an optional feature you can purchase to customize a policy. Examples include an accelerated death benefit rider, which gives the insured access to the death benefit if they’re diagnosed with a terminal illness, or a term conversion rider, which allows conversion to a whole life policy when a term policy expires, often at a lower cost than shopping for a new policy.
Underwriting: The process by which a life insurance company evaluates an application to determine the person’s risk and rates. Underwriters calculate personal life expectancy and verify information by running credit checks, consulting driving records, and checking with other reputable sources, both public and private. Underwriting is often the longest part of the process of purchasing life insurance, lasting anywhere from a few days to several weeks.
Group coverage: Many employers offer group life insurance for employees. The main benefit is that an individual’s gender, health history, and lifestyle aren’t considered. All employees receive automatic coverage that typically equals two to four times their annual pay. The downside? If you leave your job, you lose coverage.
To some young families, life insurance might seem like an unnecessary expense when there are competing priorities to budget for. But it’s one of those things you might not truly appreciate until a moment of crisis.
