Most people do not think about life insurance until they become pregnant or have a newborn. Suddenly, you are wondering if your family would have enough money for household expenses in the event of your death or the death of your spouse. Planning for the unexpected is difficult, but ensuring your child’s financial security is part of your responsibility as a parent.
What is Life Insurance?
It’s an insurance policy that would pay your beneficiary, usually a family member, a specific amount of money in the event of your death. This money could be used by your family to replace your income, pay off debt such as a mortgage, create a fund for your child’s education and cover funeral costs.
Who needs Life Insurance?
If you are married, married with children, a single parent or supporting an elderly parent you need insurance. In all of these situations, family members depend on you for financial support. If you were to die, the insurance policy would replace your paycheck to make sure that your family could maintain the lifestyle they are accustomed to.
When should I purchase Insurance?
You should purchase a policy when another person depends on you for financial support. If you are pregnant or have a newborn, make shopping for insurance a priority! Maybe you are transitioning from two incomes to a single income because you plan to become a stay at home mom. Insurance for you and your spouse is essential.
How do I choose a policy?
There are two common types of life insurance: term life and whole life. Factors like your age, income, investments, savings, and life situation will help you determine which type of policy is best for your family.
Term Life Insurance
This policy is the simplest and most affordable option for most families with small children. You pay a yearly premium for a fixed term, usually 20 to 30 years. If you die within that term, your family will receive the full amount of your coverage.
For example, a $500,000 policy for a 30-year-old male who does not smoke will cost on average $250 to $300 per year.
Term life insurance is usually recommended by financial professionals for everyone, particularly families with small children and a limited income.
Whole Life Insurance
This policy is a permanent plan that covers you for your life rather than a term. You pay fixed monthly premiums until your death. A whole life insurance policy also offers a tax-deferred cash value that grows as your insurance company invests part of your premium.
You can withdraw or borrow from this cash value account, but usually, you are heavily penalized. Whole life insurance is more costly and complex than term life insurance. For example, a $500,000 policy for a 30-year-old male who does not smoke will cost on average $125 to $160 per month.
Whole life insurance might be recommended for families with higher incomes who need a tax-deferred savings plan.
How much coverage do I need?
Most financial experts recommend you purchase 8 to 10 times your income. For example, if your annual income is $50,000, you should purchase $500,000 in coverage.
If you are a stay-at-home parent, a good rule is to purchase $400,000 in coverage. In the event of your death, this might cover expenses such as childcare and a housekeeper to help the surviving spouse.
Where should I purchase Insurance?
Look for a company that is reputable and has a strong financial strength rating. You should also contact your state insurance department to make sure the company and agent are licensed by the state.
Contact your car insurance agent to see if they offer life policies. Ask family and friends for referrals. Compare quotes on the Internet. Talk to your employer to see if life insurance is offered as an employee benefit.
Your Next Steps:
- Learn about Children’s Life Insurance.
Compiled using information from the following sources:
1. National Association of Insurance Commissioners
2. Zander Insurance Group
3. American Council of Life Insurers