Should I considering changing my life insurance when I have a baby?
Having a baby not only means navigating the world of diapers, strollers, and sleep deprivation, but also financial considerations like budgeting for daycare and setting up a college fund. As you plan for this new addition to your family, it's also important to think about how you'll help them with insurance.
For example, it’s a good idea to review your health insurance to help you have adequate coverage for prenatal care, delivery, pediatrician visits, and everything you need to protect your family's health. You should also look at life insurance to help protect your family finances.
Whether you're considering purchasing life insurance for the first time as new parents or you're already parents and have coverage, adding a new baby into the mix may changes your financial situation — and that can change your life insurance needs. This article can help you better understand:
The importance of life insurance when you have children.
Types of life insurance to consider and how much.
Different ways to get coverage.
Why life insurance may be important for new parents
The cost of raising a child can be surprisingly high. A middle-class family with two children can expect to spend over $600,000 to raise both kids to age 17, adjusted for expected future inflation, according to an analysis by The Brookings Institution.1
Many families can't afford these costs as a single-income household, so it's common for both parents to work and earn income. But if one parent passes away unexpectedly, it may become tough for the surviving parent to make ends meet, even as they're dealing with the grief of losing a partner. And if only one parent works outside the home while the other takes care of the kids, the potential impact on family finances — and overall well-being — may be even greater.
That's why, many consider life insurance particularly when you have children. A life insurance policy can be a source of financial confidence if one or both parents unexpectedly pass away while children are still young — and the cost is probably lower than you think: a healthy, non-smoking parent in their early 30's can get $500,000 of term life coverage for just $35 or less per month.* And since the death benefit, the amount of money your beneficiaries are paid if you pass away, is paid income tax free, the surviving parent can have a substantial sum to help cover essentials like mortgage payments, groceries, and clothes as your children grow up.2
So if you're about to have a baby and don't have life insurance, now is a great time to consider get a quote. Or, if you already have a policy, you may want to adjust your coverage amount (if possible) or get a new policy to account for your growing family.
How much coverage do new parents need?
One industry rule of thumb is to get life insurance that equates to at least ten times your annual income, plus the cost of college for your kids. Still, figuring out how much life insurance you should consider when having a baby depends on your situation, as areas like your outstanding debt, child care expenses, and risk tolerance can vary from one person to the next. This calculation also requires thinking about both current and future needs.
For example, if you already own life insurance because you had one child and are now having another, you might want to increase your coverage to help account for the costs of raising both kids.
Making this adjustment depends on the type of policy you have. If you have term life insurance, you might need to take out a new policy to supplement your existing one. You could also potentially cancel your current policy to buy one larger one, but the costs could be higher, depending on factors like your age. If you have permanent whole or universal life insurance, contact your agent or life insurance company to see if there may be ways to increase your benefit amount.
If you don't have life insurance yet but are starting to plan for a family, consider buying a larger policy than your current needs. For example, maybe you've estimated that a $500,000 death benefit would cover your needs with one child. But if you think you'd like to have a second child, consider taking out a $1 million policy now. That might save you money in the long run, because premiums are almost always lower when you apply at a younger age.
Also, it may be a good idea for both parents to consider life insurance coverage, even if one makes significantly less — or stays at home to raise the kids: If one parent earns little or no income but takes care of the children — and they pass away — then the surviving partner who works fulltime will likely need extra income to pay for child care and other household support. Plus, the emotional loss of a partner or parent is devastating, and while money can't fix the problem, it can help relieve financial stress at a time of grieving, pay for needed mental health support, or even allow the surviving parent to spend more time with family away from work.
What type of life insurance should new parents consider?
There are two main types of life insurance, both of which have pros and cons for new parents. These include:
Term life insurance
Term life insurance only provides coverage for a limited period, such as 10, 20, or 30 years. If the policyholder passes away during that period, their beneficiaries receive a death benefit, but there's no cash value3 to the policy — once coverage ends, there's nothing left. These limitations often make term life insurance a significantly less expensive option.
Many new and prospective parents choose term life insurance because they need or want significant financial protection while their kids are growing up. A 20-year term life insurance policy can help provide exactly that kind of protection — at a very reasonable cost — until around the time they leave the house or go to college.
Get an instant Term Life quote
Permanent life insurance
The alternative to term life insurance is permanent life insurance, which can provide coverage for your entire life. Unlike most term policies, which expire without paying a death benefit, with permanent life, an eventual payout is guaranteed as long as premiums are paid up and the policy stays in effect.
Within the permanent life insurance category there are two types of policies:4 Whole life insurance has fixed premiums and death benefits; Universal life insurance provides greater flexibility with premiums and death benefits that can be adjusted within a certain range. These policies also build cash value over time. Cash value can be accessed in a number of ways while you’re still alive, such as through policy loans.5 Permanent coverage and cash value can add significant value to a life insurance policy, but that also means the cost may be significantly higher.
Yet some young and prospective parents may prefer having a permanent life insurance policy, despite the higher cost. For example, they may be planning to have multiple children and aren't sure how long they'll need coverage. Or they like the idea of having wealth-building cash value that can be used to help supplement retirement after their children have grown and left the home.
Separate vs. joint policies
In addition to deciding between term and permanent life insurance, some parents consider buying a joint policy instead of two separate policies.
A joint life insurance policy, also known as a multi-life policy, isn't as common as individual coverage, so it may be harder to find an option that works for you. That said, the advantage of joint life insurance is that you only pay one premium instead of two, so costs may be less.
However, a joint policy only provides one death benefit instead of two, which can be paid out after the first parent passes away, or after both pass away. That can add complication to your life insurance plan. For example, if the policy pays out after the first parent passes away, and the surviving spouse still needs coverage while children are growing up, they may find it hard to buy a new policy at a reasonable cost due to age or health factors.
How to get life insurance
As a general rule, the earlier you consider life insurance the better. Rates generally increase with age, and the longer you wait to buy coverage, the greater the risk of being diagnosed with a health condition that makes you difficult to insure. Even a condition as common and controllable as high blood pressure can raise your cost of coverage.
Can you get life insurance while you're pregnant? The answer is usually yes, but if you have any medical complications it could affect your rates. Still, it can be wise to consider life insurance just before your baby arrives to avoid being unprotected during your child's newborn phase. Just remember that the underwriting process can take time, and you will often need a medical exam for approval. So a good rule of thumb is to consider applying for life insurance at least 4-6 weeks before you give birth.
Getting life insurance can be easy. A good place to start is at work: Many employers offer term life insurance plans as an employee benefit at attractive group rates. If that's not an option, or your employer doesn't offer enough coverage for your needs, getting an individual life insurance policy may be easy. Companies like Guardian make it easy to get a term life insurance quote and apply online. If you're considering getting a permanent policy, such as whole life insurance, consider talking things over with an insurance agent or financial professional who will tell you more about whole or universal policies and how various life insurance options can be tailored to your needs. If you don't have someone to discuss insurance with, Guardian can help you find a nearby financial professional who will listen to your needs and help guide you to the right solution.6
Finally, if you already have life insurance and think the coverage amount is enough, you don't necessarily need to do anything or even notify your life insurance company about having a baby. However, you may want to update your beneficiaries: For example, your spouse might be the primary beneficiary of your life insurance policy, but you might name your children as “contingent” beneficiaries who get the death benefit if your spouse passes away. But there are some important considerations to help ensure the funds are properly managed until the children reach adulthood:
It’s generally not recommended to name minor children as direct beneficiaries of a life insurance policy, because the life insurance company cannot legally pay the death benefit directly to a minor child. Instead, the court will appoint an adult custodian or property guardian to manage the funds until the child reaches adulthood.
For many parents, a better option is to create a trust and name that as the beneficiary of the policy. A trust lets you specify how and when the funds should be distributed to your children; the trustee you appoint will manage the funds according to your instructions.
Alternatively, you can set up a Uniform Transfers to Minors Act (UTMA) Account and name a custodian to manage the life insurance proceeds for your child's benefit until they reach adulthood.