So you’re expecting a new baby very soon? This is an exciting time and there are some significant life changes in store for you. Adjusting to a new life raising your baby will be quite rewarding, albeit challenging.
Learning how you can provide for your baby financially if something happens to you or to your family’s primary breadwinner should be a priority for you. This article, written from the office of a busy life insurance attorney, will teach you:
- What life insurance is
- What types of life insurance are available
- Who needs life insurance coverage
- How to purchase life insurance
- How to make sure your intended beneficiary gets the death benefit
- How much you will likely need in life insurance coverage
- How to provide for your family’s insurance needs as your baby grows into a toddler, a teen, and beyond.
What is Life Insurance?
Life insurance is a contract between the insured person and the insurance company. The insurance company agrees to pay a death benefit to the insured’s designated beneficiary or beneficiaries in exchange for the payment of monthly premiums over a set term.
The amount of coverage and the term’s length are predetermined when the policy is purchased and put into effect.
Term Life Insurance vs. Whole Life Insurance
Term life insurance is what most people think of when they think of life insurance. The insured purchases a certain amount of coverage for a set period of time called the “term’” If the insured dies within the term, their beneficiary or beneficiaries receive the amount of coverage purchased. If the insured survives the term, the policy expires and there is no cash value or return on premiums paid.
Whole life insurance, also called permanent or universal life insurance, does accrue cash value over time. High-worth individuals who max out their other retirement investment options use whole life insurance as an alternative tax-free or tax-deferred investment. They can both borrow from the policy and lend from the policy.
Whole life insurance policy premiums are much more expensive than term life. This article discusses the applicability of term life insurance to the average young family.
Who Needs Term Life Insurance?
Anyone who has someone depending upon their income or their presence to survive should purchase life insurance for a term equalling the period of dependency. These people include:
- The primary breadwinner of the household;
- A child support or alimony obligor;
- The primary caretaker of the baby or child.
Who Should be Insured in a Two-Parent Household
It is probably apparent to you that the primary breadwinner of your household should be insured in an amount of coverage that replaces their income. However, if the other parent is the primary caretaker of the baby or young child, that parent should also be insured in an amount that would purchase the child care or daycare to replace the time of the caretaking parent.
Who Should be Insured when the Parents are Divorced
If a child’s parents are divorced and one parent pays the other child support or alimony, that parent should be insured in an amount that will replace their support payments. Often the support obligor is ordered by a family law judge to maintain insurance for this purpose, and if so, the premium payments should be tax-deductible for the support obligor.
If the support obligee is the primary caretaker of the baby or young child, he or she should be insured in an amount that will pay for babysitting, child care, daycare, and/or pre-K schooling for the child should something happen to the caretaker. This assumes that the support obligor will take physical custody of the child if something happens to the support obligee.
Should a Single Parent Be Insured?
Most definitely, yes. If there is only one parent in the baby’s life, that parent is solely responsible for caring for the baby and for supporting the baby financially. A single parent should be insured in at least an amount of coverage that would provide for the baby until age 18, and if the premiums are affordable, to provide for college expenses.
How to Calculate the Amount of Coverage Your Family Needs
Calculating the Amount of Insurance Coverage to Replace Income:
If you look online, you will find that most insurance companies advise purchasing six to 10 times the annual income to be replaced. Another way to calculate the amount of life insurance coverage you need is to multiply the annual income to be replaced by the number of years your child will need to be provided for. This may be 18 years, or 22, or 18 plus an additional amount of coverage to help pay for college.
Calculating the Amount of Insurance Coverage to Care for the Child:
If you are the primary caretaker and the other parent is the primary breadwinner, the primary breadwinner will take over caretaking responsibilities should something happen to you. You can calculate the amount of coverage you need by estimating the annual cost of supplies the baby needs, now and as he or she grows, as well as child care and education expenses.
Calculating both Income and Child Care Coverage:
If you are both the primary breadwinner and the primary caretaker, you have to combine these two approaches as well as identify people in your life who could and would act as the guardian of your child should something happen to you. You should have discussions with these people about their willingness to care for your child and how much they think it would cost to care for your child.
It is a good idea to name a primary guardian as well as a secondary guardian to take the primary guardian’s place should the primary guardian be unavailable to serve, for any reason. You can make these designations in your will.
Laddering Multiple Policies to Save Money on Premiums
If you are the primary breadwinner and you calculate you need $500,000 in insurance for your baby, do not just go out and purchase a 25-year policy for $500,000. The premiums will be high, and you do not need that much coverage as your baby grows.
You could instead purchase three separate less expensive policies, such as:
Policy #1: 10-years, $200,000
Policy #2: 15 years, $150,000
Policy #3: 20 years, $150,000
In the first ten years of your baby’s life, you have that $500,000 worth of coverage you believe you need. After ten years, that first (and most expensive) policy expires, leaving with you with $300,000 coverage for another five years. When that term expires, you will be left with $150,000 coverage for another five years, until your baby is 20 years old or so.
How to Purchase Term Life Insurance
Complete the Initial Application and Medical Questionnaire
If you are relatively young and in good health, there are insurance companies that will allow you to complete the purchase of a term life insurance policy entirely online. You will complete an application disclosing all of your personal and contact information and designating your beneficiary or beneficiaries. You will also complete a medical questionnaire and disclose all past and current conditions, surgeries, and medications.
Is a Medical Exam Required?
Sometimes. This will depend upon several factors, including your age and medical history and the amount of coverage requested.
Do I Have to Disclose Absolutely Everything?
Yes. If you fail to disclose something that is later related to your death, the insurance company can deny your beneficiary’s claim because you misrepresented your lifestyle or health. For example, if you die from lung cancer and did not disclose that you smoke cigarettes or used to smoke cigarettes, the insurance company will certainly deny your beneficiary’s claim.
If you fail to disclose something that is ultimately unrelated to the cause of your death, but you die within the first two years of the policy term, the insurance company can deny your beneficiary’s claim because you misrepresented your lifestyle or health and died within the “contestability period.”
How to Make Sure Your Baby Receives the Death Benefit
You cannot name a minor child a beneficiary of your life insurance policy. If you do, a judge will have to appoint a receiver of the death benefit and a guardian for your child.
A way to avoid this is to visit an estate planning attorney and form a trust for your child. You then designate the trust as a beneficiary of the death benefit on your policy or policies, with your designated guardian as trustee. That way someone of your choosing can administer the funds and care for your child.
About the Author
Veronica Baxter is a blogger and legal assistant living and working in the great city of Philadelphia. She frequently works with Chad Boonswang, Esq., a national life insurance beneficiary lawyer.