Having a family is a rewarding experience that brings new financial considerations.
As a new parent, life insurance can help you plan your future and give your child lifelong security in the event that something unforeseen happens and you are no longer around to provide the support your family needs. Life insurance plays an important role in financial planning and is a starting point for building a secure and prosperous future. One of the main reasons for life insurance is to provide income replacement to your loved ones if you die. If you select a policy that builds cash value, it may provide money to help with temporary needs for emergencies.
New parents should carefully choose their beneficiary designations before or after a child’s birth, and update them as needed. By naming beneficiaries, you will ensure funds are available immediately if you die; otherwise, they may flow into the estate, which may result in delays and further expenses.
Consider the financial impact on your family after the newborn arrives:
- Are maternity/paternity benefits available from your employer?
- How will cash flow be affected if only one parent works full-time?
- How will a new baby affect household expenses?
- Can you save for the child’s future?
Life insurance can help you plan for the future and may help provide financial stability for your dependents. If you buy life insurance in your 20s or 30s, you may find that premiums are lower than they may be when you are older.
The Different Types of Life Insurance. The two basic types of life insurance are term life and whole life.
- Term life offers coverage for a specific period of time, and may be renewed without additional proof of good health. Term life is an attractive option for young families buying life insurance for the first time. Premiums are initially more affordable, though they may increase with each renewal.
- Renewable and convertible policies have features that may make premiums more costly. A renewable term life policy allows you to renew at the end of the term. The premium may increase each time you renew, but there are term products available that maintain the same premium for many years. A convertible term life policy offers the option of converting your term insurance into whole life insurance. These policies allow you to upgrade to a permanent whole life policy that builds up cash value, a feature that is not found in term life policies.
- Whole life offers permanent coverage and lifelong protection. As long as you pay the premium due, the policy will remain in force. Whole life offers cash value that increases over time, with premiums that will not increase and death benefits that will not decrease (note: loans against a policy will reduce the death benefit amount by the sum owed).
Stay in good health. Life insurance premiums can vary and several factors can influence premium rates, including the amount and type of coverage; age, gender, health and lifestyle choices; and family medical history. Premiums may be higher if you are overweight, smoke or have a medical problem, because to an insurance company, these characteristics may make you a greater risk.
Shop around before you make a decision. Before you purchase a policy, ask around for recommendations and research various companies. Look at a company’s history of paying claims, customer service standards and how easy it is to do business with them. Obtain quotes from several companies before making a final decision.
How much insurance should you obtain? The amount of insurance you need will depend on your personal circumstances. Some factors to consider are whether your spouse works, if there is another family member you provide for, if you have a mortgage and whether your combined savings (including certificates of deposit and investments) add up to less than two years of household income.
Select an affordable policy. You should select a policy that meets your needs at an affordable and competitive premium. Calculate how much cash and income your dependents will need when you die. A good way to determine the correct amount is to add up all of your current and future obligations and then subtract your assets. A quicker way to get a general idea of your needs is to multiply your salary by five. Using this formula, a person who earns $60,000 annually will need approximately $300,000 in insurance. As this will vary among individuals, an insurance company representative can review your situation to help set the correct policy amount for you.
Update your policy periodically. It is important to update your life insurance policy periodically to reflect the changes that occur at different stages of your life. This should be done with the birth of each child or whenever a new, major debt is acquired, such as the purchase of a new home.
Tell your family about your policy. Your family members must be aware of your policy and know where to find important paperwork in order to claim death benefits. Typically, to claim life insurance death benefits, a copy of the death certificate and a statement from the beneficiary is needed; however, the requirements will vary from company to company.
You will enjoy peace-of-mind knowing that you have taken steps to help provide for your new family.