Few personal milestones compel someone to buy life insurance coverage like becoming a parent.
In the event of an untimely death, life insurance can serve as a safety net to ensure there’s money available to pay for everything from medical bills to a home mortgage and the future college education costs.
Many Americans have taken steps to line up such a financial cushion.
At the end of 2012, there were 146.2 million individual life insurance policies in effect, with coverage totaling $11.2 trillion, according to the American Council of Life Insurers.
Here are five tips for new parents looking to buy life insurance:
1. Learn insurance options
Life insurance policies can vary widely, but they generally fall under two categories: Term insurance and permanent insurance, which are often referred to as whole life or universal insurance.
With term insurance, you pay a premium for a set period, commonly 10 or 20 years, and your policy entitles you to a specific amount of money. Unless the policyholder dies, triggering a payout, any premiums paid are lost once the policy term ends.
In contrast, whole life insurance policies cover insured individuals as long as they live. These policies also function as a savings vehicle. A portion of the premiums paid for the policy are invested to provide a pool of money that the policyholder can access, tax-free, while they’re still alive. Such policies are generally more expensive than term life insurance, however.
Andrew Porter, a certified public accountant in LaFayette, Calif., advises clients who are new parents to avoid whole life insurance.
“The cheapest form of insurance, generally speaking, for healthy, young adults is term (policies),” Porter said.
2. Determine coverage priorities
Generally, an insurance agent will help you determine an appropriate coverage amount for the policy by examining some of the key costs your family will have in years to come, such as the cost of child care, education and the mortgage.
Another approach is to figure out how much income you’re expected to earn over your lifetime.
Still, while it might be tempting to think of life insurance in terms of a dollar amount, it makes more financial sense to tie that amount to a goal, like paying off a mortgage or college tuition, said Porter.
“If you’re going to buy insurance, you want to have a specific use for each policy,” he said. “It opens the way for insurance agents to oversell insurance that you may or may not need.”
Life Happens, a nonprofit organization funded by insurance and financial companies, has an online worksheet to ballpark your insurance needs before you meet with an agent: bit.ly/1icrq0n.
3. Buy a policy early
The cost of life insurance doesn’t hinge on your credit rating, savings or assets. It’s determined by your age and the results of a medical evaluation that’s required every time you seek coverage.
If you’re a couple in your 20s and healthy, you'll pay less than when you’re in your 30s and 40s.
“If you can qualify now, it’s better to do it, versus waiting and something could change in your medical situation and you may end up not qualifying,” said Craig DeSanto, head of life insurance and long-term care at New York Life. “And the younger you buy, the cheaper it is.”
A 20-year-old man who is healthy and doesn’t smoke could be charged, on average, $32.53 a month for $500,000 in coverage on a 20-year term life insurance policy, according to an estimate by insurance quote portal TrustedChoice.com.
By comparison, a 50-year-old with the same health characteristics would be charged $111.38 per month for the same coverage.
4. Consider insuring both parents
It’s common for both parents to work and contribute to household expenses and the costs of caring for their children. That’s one reason experts recommend both spouses have life insurance, particularly if they both pitch in to pay the mortgage.
But even in cases where one parent quits work to care for a young child, that parent should be insured.
“If you’re providing for someone, it’s not just income that you make as an employee, it’s the value you’re providing taking care of a dependent,” said DeSanto.
5. Consult the pros
Wading through the trove of life insurance offerings can be challenging. It’s best to consult with a financial adviser and meet with an insurance agent who can provide the most up-to-date rates and policy options available.
To find life insurance agents on the Life Happens portal: www.lifehappens.org/agent-locator/.
To find a financial adviser, try the National Association of Insurance and Financial Advisors: www.naifa.org/consumer/advisor.cfm.
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