The New Parents Guide to Life insurance

Each family is unique — as are their life insurance needs. Therefore, no single life insurance policy is best for all families.

That said, some policies may be more suitable for young parents, such as a twenty-year term life insurance policy. This policy provides financial protection to your family until your child completes high school.

Before you compare life insurance quotes for new parents, it is important to understand the following two common life insurance terms:

The Insured

The insured is the person whose life is covered by the insurance policy. When the insured passes away, the death benefit is paid to the beneficiary.

The insured will be you or your spouse. If both of you earn a similar salary, you might want the same level of coverage. By contrast, if yours is a single-income household or if one of you earns significantly more than the other, you might consider getting different levels of coverage. An insurance policy will cover income replacement and debt repayment should the insured pass away.

The beneficiary

A beneficiary is a person or persons who receive the death benefit from your policy. Generally, people name their spouse as the beneficiary, but if you want, you can name your spouse and children as co-beneficiaries.

If you are divorced or separated, you can name your child as the sole beneficiary. However, keep in mind that life insurers cannot issue payouts to minors. If a minor is named as a beneficiary, the payout is usually transferred to a trust.

Why new parents need life insurance?

It is a simple fact that kids are expensive to raise. The average cost of raising a child in Canada is $10,000 - $15,000 a year until the child turns 18. This amount can vary wildly depending on your lifestyle.

Ask yourself: Will your spouse or partner be able to bear all child-related expenses if something happens to you tomorrow?

Probably not. And this is where life insurance comes in.

Life insurance issues a death benefit to your beneficiary — a spouse, for instance — when you pass away. The surviving spouse can use the payout to put food on the table, pay bills, and cover education costs.

For example, you purchase a 5-million-dollar life insurance policy and make your spouse the beneficiary. If you pass away while the policy is active, your spouse gets the 5-million-dollar payout.

Best life insurance for new parents

Young parents can either buy term life or permanent life insurance. Term life insurance is sufficient for most families, but permanent life insurance may work well in certain situations.

Term Life Insurance

Term life insurance offers coverage for a limited period picked by you, like 10, 20, or 30 years. If you die during this period, the insurer will issue the death benefit to the beneficiary.

Term life insurance is a great option for most families. Because it is cheap, young parents can purchase enough coverage to build a robust safety net. Ideally, you want term life coverage that lasts until your child becomes financially independent.

Permanent Life Insurance

Permanent life insurance does not come with an expiry date. The coverage lasts until your death, as long as you pay the premiums. Many permanent policies also bundle up as an investment tool. They have a built-in savings account that grows on a tax-deferred basis.

Permanent life insurance can make sense for those with a lifelong dependent, like a child with special needs. Wealthy parents can also use it for estate planning. Your children can use the death benefit amount to pay off estate taxes.

When should new parents buy life insurance?

Right now is the best time to buy life insurance. For every year you delay buying a policy, your rates go up by 4.5%-9%.

Here are some common situations when putting a life insurance plan in place makes perfect sense.

You plan to have a child in the next 3-8 years

If you plan to go from being a twosome to a trio in the near future, we recommend applying as soon as possible to lock in lower rates. Life insurance is like other financial tools. You will not wait until your retirement to create a retirement fund, and likewise, you should not postpone buying life insurance until you become pregnant.

You plan to become pregnant or are already pregnant

While you can get coverage if you are expecting, you may receive a higher premium. Sometimes, pregnancy comes with medical complications that can increase your rate. Generally speaking, the best time to apply is before you fall pregnant or in the first few weeks of pregnancy.

You are going to have a baby through a surrogate or plan to adopt a child

If you are having a baby with a surrogate or adopting a child, keep in mind that the application process can take four to six weeks. For this reason, you may want to put a life insurance plan in place before the child enters your home. That way the child will be financially protected right from the moment it becomes a part of your family.

How much life insurance do new parents need?

As a new parent, you would want your life policy to cover earnings and spending, as well as child-care costs, the mortgage, and funeral expenses.

Generally speaking, a death benefit amount that is 10 to 12 times your annual salary is a good ballpark figure. However, if you want an estimate that is more suitable to your family’s unique needs, consider this four-step method:

• Decide how many years of income you want to be replaced and then multiply your annual income by that number
• To this figure add debts (like the mortgage) and future financial obligations (like college tuition fees)
• Also, add the cost of services that you provide. After your death, your spouse may have to pay someone for those services
• Consider your savings and other assets. Subtract them from the above figure to find out how much coverage you need

Why life insurance is good for your family?

Life insurance for parents — why is it important? The reason is simple: It ensures your loved ones do not suffer more than they have to if you were to die unexpectedly.

It is difficult to think about death, but planning for it in advance, is the best way to secure your family’s future. Life insurance cannot replace you, but it can replace some or all of your income.

Putting a life insurance plan in place means that your family can live comfortably after you are gone. The payout can help your spouse keep the family afloat, pay off the mortgage and other debts, cover tuition fees, and fund their retirement.

Your family can also benefit from the cash value component (if your policy has one) while you are still alive. You can withdraw money from it or take a loan against it and use the funds however you like. If you have accumulated sufficient cash value, you can also use it to pay for future premiums and channel the funds kept for that purpose to some other project.

Should both parents have life insurance?

Some think only the main earner of a family needs life insurance. If something happens to them, the payout will help surviving family members stay afloat.

But this line of thought does not take into account, the financial impact of the death of a stay-at-home spouse. A stay-at-home spouse is often the primary caregiver to children and performs many other jobs in the home. If the primary caregiver were to die unexpectedly, the surviving spouse would have to replace the services they provided — and that can prove quite expensive. Life insurance protection, in such a case, may save the family from much financial hardship.  

If you want a policy for yourself and your spouse, you have two options. You can buy two separate life insurance policies or a joint life policy. The joint-life policy is generally cheaper since there is only one payout associated with this policy.

How life insurance is priced

The cost of life insurance depends on your personal factors and policy-specific details. Here are all the factors that impact your premium rate:

1. Age

Your age is one of the most important factors in determining your premium rates. Younger people are less likely to die and hence are cheaper to insure.

2. Health

Insurers reward healthy applicants with lower premiums. On the other hand, certain underlying conditions, like diabetes, can push your rates up.

3. Tobacco Use

No single factor impacts your cost of life insurance more than your smoking status. If you smoke, expect to pay two to three times more for coverage.

4. Family History

Many diseases have a hereditary component. If you have a family history of illnesses like cancer or heart disease, you are likely to receive a higher rate.

5. Your Gender

Women live six to eight years longer than men on average. Not surprisingly, they pay less for life insurance.

6. Death Benefit Amount

The greater the death benefit, the higher the insurance premium. So, a life insurance policy with a $100,000 death benefit will cost less than the same type of policy having a payout of $500,000.

7. Type of Life Insurance Policy

Permanent life insurance is more expensive than term life insurance because it covers you for your entire life. Within the second category, a longer-term policy will cost more than a shorter-term policy for the same death benefit.  

8. Riders

Riders are added extras that allow you to customize coverage to suit your unique needs. However, they often come at an additional cost and can bump up your premium.

9. Occupation & Lifestyle

If you have a job or a hobby — like skydiving or bungee jumping — that puts you at risk, expect to pay higher premium rates.

The cost of life insurance for new parents may vary wildly among companies. For this reason, get quotes from multiple providers and check how they stack up against each other. The whole exercise will not take much time but can help you save hundreds of dollars a year on life insurance.

What is the best life insurance for parents?

So, what is the best insurance policy for parents?

For most young parents, term life insurance is the best option. A 20- or 30-year term life can help new parents secure coverage while their kids depend on their income most. By the time the policy ends, the kids will be grown and have become financially independent.

Parents with children who have special needs, however, may want to consider permanent life insurance.. Permanent life insurance provides lifelong coverage, so you can rest easy knowing your dependents will receive the payout when you die. A permanent life policy can also be a good option for high-net-worth individuals or those who want to do estate planning.

Both parents, regardless of whether they bring home a paycheck, need life insurance. A stay-at-home-spouse provides services, like childcare, that a working spouse will have to cover if they pass away.

If you do not want to buy two separate policies, consider joint-first-to-die life insurance. It is cheaper — as it covers the life of both partners — and issues the death benefit to the surviving spouse if the other dies.

New parents should know

Life insurance is an important risk management tool for new parents. If something were to happen to you, it will replace the financial support you provided to your family. It will ensure your spouse and children do not experience a financial tragedy on top of the tragedy of losing you. By working with an independent broker like Dundas Life, you can get a life policy that is right for your family at a competitive rate.