Children change their parents’ lives forever. As a new parent, you’ve become responsible for the life of another person for at least the next 18 years.
According to the United States Department of Agriculture, the average cost of raising one child is $233,000. This includes food, housing, transportation, health care, clothing, education, and other items.
Right now, as you’re dealing with sleepless nights and dirty diapers, you’re also planning to work hard for the next decades to pay for what your children will need while they’re growing up.
But what will happen if something happens to you and you’re not around to earn the money needed to raise a child?
If you don’t have life insurance by the time you have your first child, you definitely need coverage once you become a parent. It may not be your first priority when that child arrives, but it’s something both parents need to have to ensure the child’s future.
If one or both parents pass away, the death benefit from a life insurance policy can cover their financial needs into adulthood.
It’s important not to underestimate how much surviving family members would need from a life insurance policy.
Some parents may determine that the $233,000 average cost of raising a child is a good starting place for determining their coverage needs. Just keep in mind that figure is based on a national average and may not fit your needs. Plus, that’s the cost for raising one child; it will take more than that if you plan on having more than one kid.
Also keep in mind that if your household budget is based on two incomes, your surviving spouse will need part of your policy death benefit to maintain the family lifestyle if you pass away early.
Basic living expenses like food and clothing will only increase as your children get older. The amount of your life insurance should reflect this.
Not only that, but you may also want to ensure your life insurance can help pay for college. To do that you need to factor in the likely increases in tuition costs.
You should conduct a personalized life insurance needs analysis. This is often done with the help of an independent licensed insurance agent. A needs analysis explores your current financial situation and future financial needs to get a clear picture of your insurance needs.
Learn More: How Much Life Insurance Do I Need?
Both parents need to be covered by life insurance. In the case where both parents work, your household budget is based on both incomes. If one spouse dies, there will be funeral expenses and other settlement costs. In addition, the surviving spouse will lose the income provided by the dying spouse.
Even if only one parent works, both should have life insurance. If the non-working spouse passes away, the surviving spouse will need to start paying for child care and other services that the non-working spouse provides.
There are a number of life insurance options.
Perhaps the best option for a new parent is a 30-year term policy. If you purchased the policy shortly after the birth of your first child and have two more kids over the next several years, your policy will provide coverage until your third child graduates college. Depending on your age at the time you buy the policy, a 30-year term policy may cover you until you near retirement age.
Another option is whole life insurance. This type of policy is designed to provide coverage for the life of the insured. As long as the policy owner pays the required premium, the insured will always have life insurance coverage. Unlike term, there is no expiration on whole life insurance.
A whole life policy’s premium and death benefit typically remain the same for the life of the insurance contract.
Because it’s designed to provide lifelong coverage, whole life is considerably more expensive than term life insurance. This may make it difficult to afford for parents of a new child because of those added expenses.
Even a 30-year term policy for the total amount of recommended coverage may be pricey for some new parents.
One way around that is to add a guaranteed purchase option rider, sometimes referred to as a guaranteed insurability (GI) rider.
This rider enables you to increase the amount of your coverage without having to go through the underwriting process. That means you can start out with a lower amount of coverage, then increase it over time as your budget allows and your insurance needs grow.
New parents may already have group life insurance through their employers or another source. However, a group policy likely won’t be enough to provide the needs for a surviving spouse and children.
The main limitation of group life insurance is that it’s contingent on your employment or group membership. If you lose your job or change jobs, you can’t take your group life coverage with you. While your next employer may offer group insurance, there’s no guarantee. Plus, you will not have life insurance coverage during any period of time in which you’re unemployed.
In addition, the death benefit offered by group policies is typically capped at an amount far less than what’s required to provide for your family for many years.
The maximum is usually a base amount for all participants, such as $100,000. Employer policies often limit you to a maximum based on your salary (e.g. 3x your current income).
Depending on the needs of your surviving family, your life insurance may need to be 10 times to 15 times your current income.
Participating in a group life insurance plan is a good way to supplement your coverage at a reasonable cost. But you should also own an individual policy to ensure that you have adequate coverage.
If you plan to have children, you don’t need to wait until they arrive before you get covered by life insurance. In fact, the younger you are when you apply for life insurance, the more affordable it will be.
It’s possible to buy life insurance when you’re pregnant, but it’s not always the best time. Being pregnant can adversely affect your underwriting because of weight gain and other medical conditions. This can negatively impact your premium rates. It’s best to apply for life insurance before you become pregnant or at least within the first two months of your pregnancy.
The life insurance application process can take four to six weeks, sometimes even longer. Keep that in mind if you’re planning to adopt and want coverage as soon as you have your adopted child.
Jack Wolstenholm is the head of content at Breeze.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.