Life Insurance for New Parents

Every time your family grows, your need for life insurance increases. Each child adds to your parental responsibilities and it is important to make sure that your family has the income necessary to raise your children if you or your spouse were to pass away. A 2022 study by the Brookings Institution found that it costs an average of $310,000 to raise a child to adulthood, and that doesn’t cover the cost of higher education.

When should new parents increase their life insurance coverage?

There is no wrong time to increase your life insurance coverage, but there are plenty of times when you should consider it:

• If you or your spouse plan to become pregnant or adopt
• If you or your spouse are pregnant
• If you or your spouse have just given birth to a child
• If you and your spouse have adopted a child

Note that some women experience medical complications, such as gestational diabetes, during their pregnancies. To avoid being declined for life insurance or being approved at a higher premium rate, women who are looking to increase their life insurance coverage due to pregnancy may want to apply for insurance early on, before any complications arise. Those who do develop medical complications may want to wait until after they have given birth to apply for life insurance coverage so that any medical concerns associated with pregnancy have time to resolve before the life insurance medical exam.

Remember, parenthood doesn’t have to be imminent for you to consider increasing your life insurance coverage. If you and your spouse plan to grow your family in the next ten years, a 30-year term policy (or a permanent policy) would provide coverage for the majority, if not all, of your future child’s childhood.

What type of coverage is best for new parents?

Term life insurance is the most cost effective life insurance option for new parents. It provides relatively inexpensive coverage for the period of time when the costs of raising a child are the highest. For example, a 10-year term policy could cover the costs of daycare and preschool, a 20-year term policy could pay for the costs associated with raising a child through to adulthood, and a 30-year term policy could replace all those costs as well as the cost of higher education.

Permanent life insurance is a more costly product, but it can be a good choice for individuals who are interested in leaving a legacy to their beneficiaries and for parents with lifelong dependents. If you have a child with disabilities who will never be able to live independently, a permanent life insurance policy can ensure that there are funds available for your child’s care after your death. The death benefit can be paid to a special needs trust that can then manage the funds on behalf of your child.

Should new parents buy coverage for their children?

Life insurance is predominantly used to replace a family’s income should a wage earner pass away. However, life insurance is also often used to pay for final expenses, including funeral and burial costs. While painful to contemplate, parents may want to secure life insurance policies for their children just in case the worst comes to pass.

There are two ways to do this:

1. You could purchase an individual life insurance policy with your child as the primary insured. Life insurance is an age-based, health-based product, so premium pricing is normally the lowest it will be if a policy is purchased when a child is very young. Note that most policies sold with child insureds are permanent policies. There may be coverage limits that depend on the age of your child.
2. You could purchase a child benefit rider on your own policy, which provides a small amount of temporary protection for your children until they reach adulthood. Depending on the terms of the rider, this coverage may be convertible to permanent insurance at certain points in your children’s lives.

While life insurance for children has benefits, it’s important to first prioritize life insurance for yourself and your spouse, since you are the ones contributing to the household income. This will allow you to maintain your family’s standard of living should a parent pass away.

How much coverage is necessary?

The amount of coverage that is necessary for new parents depends on multiple factors.

1. How much money would the survivors need to maintain their quality of life if one parents were to pass away? What if both parents were to pass away?
2. What are your goals for the death benefit? Is it important to you that your child attends college with no student loans? Do you just want to provide enough replacement income to last through high school graduation?
   

   Note: If higher education is a priority in your family and you expect your child to go to college, you may want to consider saving for education via a 529 plan.

3. What can you afford? Permanent life insurance will always be more expensive than a term life insurance policy with the same amount of coverage, but not all people need permanent coverage to meet their personal goals. Remember that almost any insurance policy is better than no insurance policy.

You will also want to consider funds that come from other sources, like an employer-sponsored life insurance policy, but be realistic. If you have employer-sponsored coverage, the death benefit is likely to be one or two times your annual income – which would provide replacement income for only one or two years past your death. Unless your children are older, employer-sponsored coverage is unlikely to sustain your children’s quality of life through to adulthood, so you may need additional coverage.

How should new parents handle beneficiaries?

Married couples often designate each other as their beneficiaries with the expectation that the surviving spouse would continue to raise any children in the deceased spouse’s absence. For single parents and divorced couples, designating a beneficiary may not be so simple.

It’s important to note that while a minor child can be the beneficiary of a life insurance policy, a life insurance company cannot directly pay a death benefit to a minor. To accommodate this, you could set up a trust to be the beneficiary of your life insurance policy and provide instructions within the trust document for how the death benefit should be utilized for your child. You could also designate a trusted adult (e.g., the child’s grandparent or the person you would choose to be the guardian of your child if you passed away) as the policy’s beneficiary.