Congratulations on becoming a parent. If it wasn’t the case before, it certainly is now: Someone depends on you. And if you’re suddenly gone, it may put your child in a tough situation. That’s why parenthood typically prompts people to look for life insurance.
“As a new parent myself, I can tell you that the need for new parents to have insurance is paramount, and the type of policy can be even more crucial,” commented Doug Collins, a CFP® professional with Fortis Lux Financial in New York City.
So, what kind of life insurance is appropriate for a new parent?
The first choice will be between the two basic forms of life insurance: Term life insurance or permanent life insurance.
- Term life insurance is basic coverage that provides a death benefit for a set number of years. That is typically 10 or 20 years, although policies for as few as five years and as many 30 years are available.
- Permanent life insurance offers lifetime coverage. This category includes whole life insurance, universal life insurance, and variable life insurance. These different types of permanent life insurance offer different options for accumulation and premium flexibility.
To help decide, you should consider:
All three of these areas should have some bearing on the type of life insurance best suited for your situation. And the answer and range of affordability (examples below) could be surprising, depending on circumstances.
Immediate protection needs
How much coverage should a new parent have? The most straightforward way to find out is to crunch numbers involving your dependents and your financial obligations.
“You need to review your family’s protection plan and what may have changed for you and your partner,” said Noah Kahn, vice president of business development for Coastal Wealth in Ft. Lauderdale, Florida. “For example, when I first started my career, I initially purchased a term policy to lock in my health and my insurability, with the knowledge that I wanted to start a family one day. And now a lot has changed since I was 26. I am earning more. My wife and I have a mortgage. And we are now expecting our first child. So, it is without question I need to get more coverage. The question is how much coverage, and should I get more whole life or term?”
This tool will help you figure out coverage needs for your situation: Life Insurance Calculator.
And be warned, there are some pitfalls and considerations to take into account as well.
Many people get life insurance as part of their work benefits. And while that is helpful, it is often not a full solution in and of itself. Employer plans usually have coverage limitations that fall short of actual individual needs, especially when family responsibilities are considered. (Related: Is group life insurance enough?)
Also, most employer life insurance plans aren’t portable, meaning you’ll lose the coverage if you change jobs.
And, when considering life insurance coverage, many people only consider their present income, not their future earning potential. That means they are only considering the life insurance question in terms of what they need today and not what they will need to protect their family and loved ones down the road.
The following chart illustrates the aggregate income earned by someone at various age points assuming they make $100,000 annually until age 65. It does not account for pay increases, inflation, taxes, the value of any other contributions, or the time value of money.
This chart shows how future income can add up. So, when thinking about life insurance needs, consider that it needs to protect the future income stream you would have provided to your family, and not just the immediate paycheck. (Related: What kind of life insurance should I get?)
Also, don’t overlook the need to fully account for a nonworking spouse or partner.
“One thing that often gets overlooked is a parent — one who may not be the breadwinner — either forgoing insurance or being underinsured,” warned Collins. “It is important to look not only at lost income from a premature death of one parent but also if expenses would be higher from the loss of a caregiving parent — such as the need for a full-time nanny.” (Related: Stay-at-home parents and the need for life insurance)
Long-term financial goals
As a new parent, you may need to consider expanding financial options and resources to support your family over time. Life insurance can help. That’s because beyond guaranteed lifetime protection for family and loved ones in the event of an untimely passing, some types of permanent life insurance can also serve to accumulate and grow funds, thereby providing financial options for the future.
This is done through the cash value component of permanent life insurance, where funds in the policy build up over time as premiums are paid. In the case of whole life insurance, that cash value grows on a tax-deferred basis at a rate set by the carrier. Other types of permanent life insurance offer access to other types of investment options. (Related: Understanding different types of permanent life insurance)
As a result, cash value can provide a ready source of funds if needed in the future. Policyowners can tap the cash value of a permanent life insurance policy for any reason — a down payment on a house, college tuition, or supplementing retirement income.1
Additionally, some types of permanent insurance offer the opportunity to earn dividends. Dividends for participating policies can also help increase the life insurance coverage and build additional cash value, adding to the accumulation opportunities of whole life insurance. Dividends can also be used to increase insurance protection or help reduce out-of-pocket costs for a policy.2 (Related: What goes into dividends)
By contrast, term life insurance doesn’t offer accumulation or dividend opportunities. So, if building future financial support and options is a priority, you should look at permanent life insurance options.
Most people overestimate the cost of life insurance.
Asked how much a 20-year, $250,000 term life insurance policy would cost for a healthy 30-year-old nonsmoking male, respondents to an industry survey guessed $500 a year or more.3 The actual price is roughly $165 a year.
Indeed, term life insurance can be very affordable. You can get your own quote on a term life insurance policy here.
Term life insurance is affordable because it is basic protection for a specific period. And that can make it a good choice for a new family that has a tight budget but needs immediate protection.
“Like at any other time in life, everyone’s situation and goals are different, but I typically recommend new parents obtain all the term insurance they would ever need as soon as possible,” said Collins. “Most people opt for the 20-year term, but depending on your age and assets, sometimes a 30-year term provides a lot of value.”
For lifetime protection with the financial features noted above, a permanent life insurance policy, such as whole life insurance, will be needed.
“When selecting the type of coverage, I always fall back on a simple principle instilled in me by a top financial professional when I first started in the business: Buy as much whole life as you can afford and as much term as you need,” said Kahn. “Considering my wife and I are about to incur a lot of additional expenses with a new child, I will definitely be increasing my term insurance coverage to the appropriate amount first — and not increase my whole life premiums until we have a handle on our new expenses.”
Permanent insurance like whole life will cost more but, as with term insurance, not as much as many people might think. And it has the benefit of building up cash value over time, becoming an asset in a family’s overall portfolio.
Other things to know about life insurance affordability?
- The cost will vary depending on the age, health, and other personal aspects of the policyowner plus the length of the premium plan. (Related: What does life insurance cost?)
- Life insurance plans with shorter premium timetables have higher annual payments but build up cash value more rapidly. (Related: Whole life insurance: Balancing protection and accumulation)
- Annual premium payments can be divided into semiannual, quarterly, or monthly payment schedules to accommodate various budgets, albeit with a service fee. (Related: What premium plan will work for you?)
So, what can a new parent expect in terms of cost for a life insurance policy?
Let’s consider, for example, the cost of a whole life policy with a death benefit of $100,000 for a nonsmoking woman in excellent health, where the premiums are divided out over the years until she reaches age 65.
In this example, we look at the annual premium as well as the guaranteed cash value after 20 years, long enough for a young child to grow to college or marriage age:
If she buys the policy at age 25:
- Annual premium to age 65: $1,271.
- Guaranteed cash value at 20 years: $20,597.
If she buys the policy at age 30:
- Annual premium to age 65: $1,548
- Guaranteed cash value at 20 years: $25,408
If she buys the policy at age 35:
- Annual premium to age 65: $1,891.
- Guaranteed cash value at 20 years: $31,945.
This is a basic example that doesn’t include the possibility of adding riders to the policy or the possible performance of dividends and various reinvestment options. (A MassMutual financial professional can generate illustrations like the ones above tailored to your situation.)
What if our female insurance shopper opted for a $100,000 whole life policy that could be paid up in just 15 years?
- Annual premium over 15 years: $4,997.
- Guaranteed cash value at 20 years: $44,523.
For further comparison, a 20-year term life insurance policy for the same hypothetical female at age 30 would be about $139 annually. But there would be no cash value after 20 years. The policy term and its accompanying protection would simply end.
Nevertheless, the affordability of term insurance may be the overriding priority for a new parent situation.
“New parents are oftentimes going through huge changes in terms of expenses and income if one parent is staying home or working less,” Collins noted. “This coupled with the high cost of early child care can put a lot of new parents in a situation where they tend to be breakeven until the kids get to kindergarten. As a general rule of thumb, I tend to recommend term insurance until both of these following goals are met: Home ownership and day care/preschool no longer being an expense.”
Of course, many term policies offer conversion to a permanent policy at certain points in coverage and with associated premium increases. And this can be useful for families that start out needing immediate protection but want to take advantage of permanent insurance features as their circumstances improve. (Related: What policyowners should ask about term-perm conversions)
Also, some families opt for a combination of term and permanent life insurance to provide general protection as well as specific coverage for certain situations, like care for a family member with special needs or security for a family business. (Related: The case for combining term and perm)
Protection for loved ones is a primary motivator for a new parent. Life insurance meets that need. But it can also help provide financial options and security over a lifetime, depending on the choices. A MassMutual financial professional can help navigate those choices to come up with a plan that provides what a new parent may be looking for.
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1 Borrowing from cash value will reduce the policy's cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.
2 Dividends are not guaranteed. The amount of the dividend and the dividend payout itself are subject to change, depending on the operating performance experience of the insurance carrier in a given year. Dividends are primarily the result of favorable operating experience with respect to claims (death benefits paid), investment results, and expenses.
3 LIMRA, “Life Insurance Barometer 2021,” June 2021.