Do I need to buy life insurance now that I’m a parent?
The situation
After my husband and I had a baby six months ago, I decided to stay home for a while. That got me thinking: What if, heaven forbid, something happened to my husband, and we had no money coming in? We aren’t the savviest financial duo, but I think that life insurance is probably the answer. I just don’t know where to start.
—Kimberly, San Antonio
The solution
No doubt about it, our financial perspective shifts when we have children. It’s not just you, or you and your significant other, anymore. You have a little being who is completely dependent on you. So, your instincts are good. The purpose of life insurance is to protect the people who rely on your income. If you were single, or you and your husband had no kids, and each earned a good paycheck, you probably wouldn’t need life insurance at all. But with a kid? Definitely.
You do need to think about the unthinkable—at least long enough to get a plan in place. (Note that in terms of financial priorities, buying life insurance comes after you’ve gotten health coverage, paid off debt, and started contributing to tax-favored retirement accounts.) And yes, I know that life insurance isn’t the most exciting or uplifting subject, but heeding this advice will give all of you more security to enjoy life together.
- Term life insurance is where it’s at. In most cases, the biggest bang for your buck is something called term life insurance. It’s relatively inexpensive—that should address any fears about whether it would be worth your money. That’s because it’s only in place for a set number of years. Many agents will try to sell you something called cash value life insurance, touting it as an investment or a better deal than term life insurance. (“Buying term insurance is like renting,” an agent might say. “Buying cash value insurance is like buying.”) This is seldom the case. But selling these policies does earn the agents fat commissions, which is why they’re so eager to sell them. To shop for term life policies, try contacting individual providers like TIAA and Ameritas, or checking out Term4Sale.com, SelectQuote.com, and LifeInsure.com.
- Calculate how big a policy you’ll need—and how long you’ll need it. You’ll want to make sure that your dependents can maintain a reasonable lifestyle when you’re gone. Since you have a very young child, you probably need a policy that lasts for the next 20 years. But how do you figure out what the amount should be? Some people recommend you buy a policy that will pay seven to 10 times your household’s annual income before taxes. Others recommend up to 20 times, which may be overkill but makes sense if you have lots of kids and want to pay for their college educations—or want your family not to worry about money at all. When thinking about the income number to use in your calculations, in your case, you would use your spouse’s salary, since he’s currently the breadwinner. But don’t forget about the value of what you do. If you were out of the picture, your spouse would have to hire someone to perform whatever child-care and household tasks you shoulder—which I bet are considerable. For help figuring all this out, use the calculators at 360financialliteracy.org and basic.esplanner.com.
- Consider disability insurance. The principle here is similar to that of life insurance, in that it helps to replace a lost income. In the case of disability insurance, the person who earns that income hasn’t passed away but must leave the workforce, at least for a while, because of illness or injury. (Disability insurance is different from workers’ compensation, which you get only for injuries that occur on the job.) Your husband should check to see if he gets this as a perk from work, or if he can purchase a policy through his employer, which can be cheaper than going it alone. You can shop online for a policy—make sure it will replace 60% to 70% of your income—at companies such as Northwestern Mutual Life Insurance and MetLife, or get multiple quotes at PolicyGenius.com.
- Write a will. While you’re planning for the future, take the time to write a will that disposes of your assets and also, crucially, names a guardian for your child. An alarming number of parents with minor children haven’t done this. If both you and your husband die without creating a will, the state will pick a guardian for your child. To find local lawyers specializing in wills, consult the The American College of Trust and Estate Counsel or the National Association of Estate Planners & Councils.
One caveat: If you will need to provide income for someone for the rest of his or her life (say, a disabled spouse or a child with special needs), you should get permanent life insurance—which is a policy that covers you until you die, no matter how old you are when it happens—instead of term life. If this is the case, I recommend seeing a “fee-only” insurance consultant, who doesn’t get a commission from the companies or investments he or she recommends. Glenn Daily, a pioneer in this field, maintains a short list of them.
For more about how to shop for life and disability insurance, see Chapter 8 of my book Get a Financial Life. And for tips on preparing a will and other important end-of-life documents, check out pages 209 and 210 in the advice-for-parents section of Make Your Kid a Money Genius (Even If You’re Not). And yes, I’ll admit that this may not have been the funniest column I’ve ever written, but I can assure you that knowing you have protected your young family will brighten your mood, once this work is done.
