Understand what you're buying and why
What Is the Best Type of Life Insurance for New Parents?
by Jacob Ruiz
Calculating How Much Life Insurance You Need
How New Parents Can Budget for Child Care
Cutting the Cost of Baby's First Year
There are a lot of challenges that new parents must face and deciding which type of life insurance policy is right for them is one of the most crucial. We'll break down the main types and help you figure out which is right for your family.
The birth of your first child is certainly an exciting time and with it comes a lot of change, including early mornings, emergency diaper runs, long nights (not the fun kind), and the complete responsibility of another person's life. Amidst the day to day frenzy of raising your child, life insurance can be overlooked but it's an essential part of a responsible family lifestyle.
If you're like most people, life insurance is the only solution to the reality that without you and your income, your family faces extreme financial hardship. In most cases, mortgage loans, college tuition, medical bills, and car payments are impossible to tackle without the breadwinner's income.
While the average new parent admits the need to protect their family with life insurance, most of them are still very confused about this financial product. Life insurance is indeed complex and life insurance companies have not done the best job clearly explaining to consumers the options that are available to them. We'll attempt to bring some clarity to the primary question that new parents need answered before buying life insurance.
What type of life insurance is best for new parents?
In order to answer this question, you will have to evaluate the following information in light of your own financial needs, capabilities, and desires. You should start by understanding the difference between whole and term life insurance, the two broadest categories of life insurance.
Term life insurance provides you with coverage for a specific time period (a term). If you pass away during that time period, your beneficiaries (your spouse or children) will receive a sum of money from the life insurance company called a death benefit. At the end of the term, there is no more coverage and no more premium payments. It's similar to car insurance in that as long as you make your monthly payments (for the duration of the policy length), you're covered, but once the policy ends or you don't pay your premiums, the coverage stops.
Term life insurance is ideal when coverage is needed for a set amount of time (typically 10 to 30 years of coverage), perhaps to cover your family until the mortgage is paid off or your kids complete college. The premium costs for these policies are usually very affordable because a very small percentage of term life insurance policies ever pay a death benefit. The reason for this is simple. It's because not many people die before the age of 65. So if you're in your thirties and in good health, you can expect to secure a term life insurance policy at a very reasonable rate (often times less than $100 per month). But term coverage that extends into your retirement years can have high premium rates.
Whole life insurance, on the other hand, offers lifelong coverage. It is often referred to as permanent life insurance and a wide array of policies fall under this designation. A whole life insurance policy promises a death benefit to your beneficiaries, just like term life insurance, but it also has a cash-value component. Cash-value is the additional money from your premium payments that the insurance company invests and pays you interest on so that it grows over your lifetime. Additionally, you can borrow from it with a policy loan or collect it in total if you surrender the policy.
The actual cost of the insurance is covered by part of the premium money and the rest is your policy's savings (cash-value). The interest rates are typically higher than you would get at a bank and they accumulate on a tax-deferred basis. Whole life insurance premiums are significantly higher than term life insurance, but as you can see, only a portion of the money is permanently lost and the rest builds wealth for you.
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But which is better for young parents, term or whole?
Now that you understand the difference between these insurance categories, we can start to narrow down what may be best for you. Immediately you'll notice that term life insurance is more affordable but has no residual value. There is no return of premiums and no benefit if you survive for longer than the length of the term. Whole life insurance is more expensive but it has a cash-value component that can be used strategically to benefit you in the long run. Many people utilize whole life insurance for both its investment and retirement possibilities as well as its life insurance function. Unlike term life insurance, whole life will ultimately benefit you in one way or another. Either you will pass away and your family will receive the death benefit (but no cash-value) or you will decide you no longer need life insurance, surrender the policy, and collect your tax-deferred cash-value savings.
New parents are usually interested in careful budgeting (as you should be). So it's sometimes difficult to grasp how the long-term benefits of whole life insurance make the higher premium payments worth it. This is understandable and, in reality, whole life insurance may not be the best option for many people. Term insurance provides protection in a straightforward and affordable manner. However, when buying any life insurance product, you have to picture yourself in your later years. When your 30-year term policy expires, will you really be able to say you have no need for life insurance? Will your mortgage be paid off? Will there be college loan balances? Will all your children be grown and independent?
These are questions you'll have to ponder yourself. As you debate the merits of term versus whole life insurance, don't overlook the possibility of buying both, either in succession, by delaying a whole life insurance purchase and using term until you are ready, or in combination.
Reviewed June 2017
Jacob Ruiz is Director of Content at Sureify. Sureify is a life insurance education platform for millennials where consumers can learn about their life insurance options, estimate their coverage needs, compare policy types and walk away with a free, personalized life insurance plan so that they're equipped to buy with confidence. Sureify is devoted to providing consumers with unbiased, third-party education and resources on life insurance before they buy.
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