Life Insurance

Life insurance guide for new parents: safeguarding your child's financial future

Aug 17, 2023
couple holding young baby
The birth of a child marks the beginning of an incredible journey—and an entirely new level of responsibility. One of the most critical aspects of becoming a parent is ensuring your child's well-being, health and safety. And one of the key ways to achieve that is by providing them with financial security, even in your absence.

Sadly, among Americans with financial dependents, 2 in 5 say they are barely or not at all financially secure. That’s scary since as any parent can tell you, it’s expensive to raise a child. In fact, the 2022 Insurance Barometer study by LIMRA found that it costs $310,605 to raise a child born in 2015 to the age of 17. 

One of the most effective ways to help protect your child is to have a life insurance policy that can help cover costs so they can grow up with fewer financial worries. This guide aims to shed light on the importance of life insurance for new parents and its role in helping to safeguard your child's financial future.

Why new parents need life insurance

Becoming a parent fundamentally changes your financial outlook. You're no longer responsible just for yourself, but also for the well-being of your child. It’s not something anyone wants to imagine, but should life take a tragic turn with you or your partner passing away, what would happen to the family finances? 

Would your spouse be able to afford the home you’re living in or the lifestyle you envisioned for your family? Would the cost of your child’s care, education, and activities be too much to handle? Do you really want to take the chance that on top of the emotional hardship that you’d leave your family with money struggles as well?

Life insurance is an important tool that can help you provide financial security for your child and other dependents if you were to pass away prematurely. Even if you're a stay-at-home parent, there is real value that you provide to your household. Childcare, household duties, and other tasks that you handle daily would be very costly to outsource if you had to return to the workforce upon the death of a partner.

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Determining your life insurance needs

The amount of life insurance you need depends on your family's financial situation. A common rule of thumb is to aim for coverage 10 times your annual income. However, it's essential to review your personal circumstances and consult with a financial advisor to determine the most suitable coverage for your family.

Here are a few factors to think about when you are having discussions about life insurance:

  1. Outstanding debt: Total up what you currently owe on your mortgage, car loans, student loans, credit card debt, etc. Leaving shared obligations for one person to deal with can be a huge burden.
  2. Income replacement: If your income was no longer available, would your family be able to cope? Think about the age of your children and how many years of assistance they might need if something should happen to you.
  3. Childcare and education costs: From daycare to college tuition, raising and educating a child is expensive. Being able to leave behind enough funding to cover those expenses can help provide continuity.

Which is better for parents: term life insurance or permanent life insurance?

Life insurance policies generally fall into two categories: term life and permanent life insurance.

  • Term Life Insurance: This policy covers a specific period (e.g., 20 years). If you pass away during this term, your beneficiaries (which can be your partner and/or your children) receive a death benefit. Term life insurance is generally affordable and straightforward, making it a popular choice for young families.
  • Permanent Life Insurance: This policy lasts for your entire lifetime and includes a cash value component that grows over time. Although more expensive than term life, it provides lifelong coverage and can be a part of your long-term financial strategy.

Though there are advantages to each type of insurance, new parents—especially those on a tighter budget—can be well-served by a term life policy.

Reasons why term life insurance is a good choice for new parents

  1. Affordability: One of the most significant advantages of term life insurance is its affordable price point. Compared to permanent life insurance, term life insurance policies offer higher death benefits for lower premiums. This is particularly appealing for new parents who often have less disposable income and increased expenses during their children’s formative years. 
  2. Simplicity: Term life insurance is fairly straightforward and easy to understand, which can make it easier to access for new parents who are already juggling numerous new responsibilities. It’s as simple as choosing an insurer and then paying a premium for a specific term. If you pass away during that term, your beneficiaries receive a death benefit.
  3. Flexible term lengths: You can align the term of your policy with your needs. In most cases if you're a new parent with a newborn, a 20-year term life policy could provide coverage until your child is grown and financially independent. If your child is already in grade school, then perhaps a 10-year term might be adequate.
  4. Convertible options: Some term life policies come with an option to convert to a permanent policy within a specified time frame. This feature can be valuable if your circumstances change, and you decide you want lifelong coverage.
  5. Peace of mind: Perhaps the most crucial aspect of getting term life insurance as a new parent is the comfort it brings. Knowing that you have helped your child be financially secure if you're not around, can ease some of the worries that come with parenthood.

*Note: Permanent life insurance may also be a good option for new parents if they’re looking for lifetime coverage, flexible premiums, cash value accumulation and more. Read more here. 

A note about minors as beneficiaries

While your first instinct might be to name your child or children as beneficiaries, keep in mind that insurance companies generally won't pay life insurance proceeds directly to minors. If a minor is named as the beneficiary, a court will likely appoint a guardian to handle the funds, a process that can be lengthy and costly.

Here are a couple of options for dealing with minor beneficiaries:

  1. Open a trust: A popular option is to set up a trust and name it as the beneficiary of your life insurance policy. A trust allows you to control how and when your child will receive the death benefit. You can specify terms for disbursement, such as paying for college tuition or releasing funds when the child reaches a certain age.
  2. Appoint a guardian: If setting up a trust isn't an option, you could consider naming a trusted adult, such as your child's legal guardian, as the beneficiary. It's important to have a conversation with the person you're considering to confirm that they would be willing and able to manage the funds for your child's benefit.

Protect your child’s financial future

Parenthood comes with the profound responsibility of providing and caring for your child, now and in the future. While no one likes to think about life's uncertainties, life insurance can help  provide assurances that your child's financial needs can be taken care of no matter what happens. Exploring life insurance options is an essential component or responsible parenting and a cornerstone of any solid financial plan.

ChatGPT was used for idea generation, but the author made significant modifications and takes ultimate responsibility for the content.

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