A New Parent’s Guide to Life Insurance
I’ll never forget the day I found out I was going to be a father.
My wife of 9 years, 11 months, and 364 days and I were gearing up for our big 10th anniversary. With the pandemic going on, it would be tough to go out and celebrate, but we managed to plan something nice. Unfortunately, on this, the eve of our big night, my wife started feeling a bit ill. So it happened, that the morning of our big day was spent at the doctor’s office. He prescribed some meds and ordered some labwork to be on the safe side.
My wife, however, just didn’t feel taking antibiotics was the right move. Up until now, we hadn’t been able to have children, so when she asked me to go get her a pregnancy test, I was more humoring her than anything else. Imagine my surprise.
Why Parents Need Life Insurance
Just like that, my life, to paraphrase the Fresh Prince, got flip-turned upside down. With this shift in our priorities, we started to look into life insurance. It may be tempting to think that it’s a good idea to save money by only insuring the highest paid of the parents, but both parents should consider getting coverage, not just the one who earns the bigger paycheck. Even stay-at-home parents should consider life insurance.
Stay-at-home parents represent a different kind of income. Sure, they may not be receiving a paycheck with tax withholdings and deductions for benefits and a 401(k), but should a stay-at-home parent suddenly pass away, the surviving one will immediately find themselves in the position of having to decide how to handle child care. There is a significant possibility that they may not be able to afford it. Hence, this is where life insurance coverage comes in. The benefit would serve to pay for a nanny or daycare. It could even serve as the sole source of income if the surviving spouse takes a sabbatical in order to care for the child full time.
A Contingency Plan for Your Budget
Generally speaking, it’s a safe assumption that if both parents work, it’s because there is a practical need for both incomes. While certain adjustments can be made to be able to continue covering expenses, in many cases, the loss of an entire income can put the surviving party in the poor house.
From being able to pay the mortgage to being able to afford groceries, life insurance is more than just a big fact check. It is income replacement insurance, more than anything else.
How Life Insurance Policies Are Structured
Life insurance will pay a specific dollar amount to a beneficiary when the person who holds the policy passes away. You choose the beneficiary when you purchase a new policy and you can change the beneficiary at any time. While the policy is in effect, premiums are paid to keep it current. Missed premiums may result in a policy lapse, which in turn would leave the parties uninsured.
While you can name anyone as a beneficiary, ideally, in the case of married parents, each would have their spouse as a beneficiary. There is even an argument to be made for continuing to keep an ex-spouse on as beneficiary if you are on good terms. Only you can decide if that is a good idea.
What may not be a good idea is naming your children as beneficiaries, intuitive as it may seem. The reason is that minors cannot receive payment of a life insurance benefit. Instead, in most cases, a judge would name an adult to manage the funds for your child. This is a potentially lengthy process, during which your child will be left without the financial support you clearly wanted for them. This is why many parents on good terms with an ex will leave them on as a beneficiary. They are reasonably sure that their counterpart will continue to have their child’s best interest at heart.
It may be tempting to name a parent or a sibling as a beneficiary in the faith that they will care for their grandchild/niece/nephew. However, should this person receive the benefit, and pass away at a later date, the funds may become a part of their estate, in which case, your child may be left without support.
Choosing a beneficiary can be tricky to decide. Luckily, as stated above, beneficiaries can be changed at any time by notifying your insurance company.
Life Insurance Policies
There are essentially two kinds of life insurance offered:
Term life insurance
Term life insurance runs for precisely that: a term. A fixed amount of time anywhere from 10 to 40 years. Term life insurance almost always has more affordable premiums with a substantial amount of coverage. If you pass away during the term, and the policy is current, the benefit will be paid. If the term is up and was not renewed, or if the policy has lapsed, no benefit will be paid.
In most cases, with proper financial planning, term life should be enough to create a safety net for most families, given its affordability and high benefit potential. If at the end of the term you find you still need insurance, you can choose to renew the term at a higher premium for the same coverage amount, reduce the coverage amount, or convert to a different type of product.
Whole Life Insurance
Whole life insurance is precisely what it sounds like. Since no one knows when anyone will die, whole life usually covers the insured until an unlikely age such as 100 or 120 years old, effectively making it permanent. Because the coverage is spread for such a long time and guaranteed to go into old age, where death is more and more likely each year (thus increasing the risk of the insurance company having to pay out), whole life tends to be more expensive and hence, clients may be tempted to lower the benefit to lower the premiums.
Whole life is also known as cash value insurance. After the policy has been in force for a certain number of years, a certain amount of cash becomes available to the insured as a loan. However, abusing this feature may cause your policy to lapse under certain circumstances. There are many different types of permanent life insurance policies, including variable universal life, whole life, indexed universal life as well as just basic universal life. For simplicity and brevity’s sake, we won’t be going into those. The main difference between all the aforementioned whole life insurance types is essentially how the insurance company manages the cash value.
As a new parent, there are many things that you will worry about. When to start potty training; when to introduce solid foods; saving up for college; the list goes on and on. One thing you shouldn’t have to worry about is whether or not your family will be taken care of in the event of your untimely demise. Choosing the right life insurance should be like having clothes tailor-made. Not everyone needs the same thing.
There are tons of reputable insurance providers with tons of options that will ensure you get the right fit for yourself and your loved ones. Nothing can ever replace your absence, but with the proper life insurance, your family will not only have financial stability, but the peace of mind to be able to process and grieve without having to worry about money on top of everything else on their minds.
Oh, and in case you were wondering, my wife and I had a baby girl, and I’ve never known a love like this.
Julio Vargas Pérez
Having worn many hats in his lifetime, Julio has been called many things. A musician, a banker, a manager, a martial artist, a tech support specialist...
The list goes on, but the title he's most excited about right now is "dad". He now works for money.com sharing personal finance information and guidance and can be reached at [email protected].
Photo credits: Andrea Piacquadio IG @andreapiacquadio_ / @pixabay / Mikhail Nilov IG @dreamwood.studio / Pavel Danilyuk IG @rocketmann_team / Naomi Shi