A recent survey found that 42% of households would find it difficult to pay their living expenses (such as rent/mortgage, utilities, groceries, schooling) within six months of the death of their family’s primary earner. This is at least partly because many families do not have life insurance. The survey found that only 52% of people in the United States were covered by some type of life insurance. If you’re a parent, it’s a good idea to buy life insurance in order to protect and care for your family, even in the event of your unexpected death. Here is everything you need to know about what life insurance is, how it works, and how it can protect your family.
What Is Life Insurance for Parents?
Parents buy life insurance to provide money to a beneficiary in the case of their death. This money can support your family in your absence to pay the mortgage, fund their education, or pay other day-to-day expenses that you used to cover with your salary. Usually, the beneficiary is your surviving spouse or one or more of your children. You can buy life insurance through an independent carrier or through your employer. Coverage amounts can vary from $10,000 to $10 million, depending on the insurer, your health, and your financial situation. To maintain your life insurance, you pay a monthly premium.
However, you can name a custodian or set up a life insurance trust to hold the money in your children’s name. If you set up a trust, you will need to appoint a trustee to manage it according to your instructions to care for your children until they reach adulthood.
Types of Life Insurance for Parents
There are two different kinds of life insurance: term life insurance and permanent life insurance. Term life insurance is temporary and only covers a set number of years. You can choose between 10-, 20-, or 30-year terms. If you die anytime before your term is up, your beneficiary receives your full death benefit. Permanent life insurance lasts your entire lifetime, but it is generally more expensive. Your beneficiaries receive your death benefit when you die, but there is usually also a cash value. The cash value is a separate saving component of your plan that you can borrow against if needed while you are alive.
Why You Need Life Insurance
It’s no secret that it’s expensive to raise a child. According to recent estimates, it costs approximately $233,610 to raise a baby to the age of 18, though this amount varies based on where you live and your lifestyle. If you were to pass away, your family would lose your income, affecting their ability to pay the rent or mortgage, buy groceries, pay for daycare, and handle other day-to-day expenses. This is why life insurance is important for families: it helps cover these financial costs during your kids’ formative childhood years in the event of your unexpected passing. Depending on your plan, your life insurance death benefit can also cover some or all of the costs of your children’s education, including college.
Both Parents Should Get It
It’s a common assumption that only working parents need life insurance because they are the ones that provide a salary to support the family. However, stay-at-home parents should consider getting life insurance because, while they may not earn a paycheck, they do a lot of work to care for their children. If that parent were to die, it is unlikely that the surviving, working parent would be able to maintain that care on their own. Instead, they would need to find alternate daycare and household help, which costs money. Life insurance could help pay for this support.
How Much Life Insurance Do I Need?
Life insurance benefits are meant to replace any income you would have contributed to your family if you hadn’t died. How much that is, of course, depends on your unique circumstances, but here are some expenses to factor in when looking at plans and calculating how much you need:
Your financial contributions (e.g. your salary)How much you want to save for your child’s educationChildcare costs (if you don’t have childcare now but you are a stay-at-home parent, calculate how much childcare would cost to replace the work you had been doing at home)Your mortgage or rent costsFamily expenses or billsOther child-rearing expenses (such as extracurricular fees, camp fees, music classes)Death taxes and funeral expenses (optional)
Life Insurance Is More Affordable Than You Might Think
It is common for people to overestimate how much life insurance costs, which is why families tend to opt-out of buying it. For example, in the survey mentioned earlier, 44% of Millennial respondents greatly overestimated the cost of term life insurance for a healthy 30-year-old. The truth is, life insurance policies are much more affordable than you might think, especially if you buy a term life insurance plan.
How Life Insurance Is Priced
The annual price of your life insurance depends on what policy you buy, what company you buy it from, the coverage amount, and the length of the term. But other factors that affect the price include:
Age: The younger you are, the less you paySex: People assigned female at birth generally pay lessHealth: If you are in good health, you pay lessSmoking habits: Non-smokers pay lessLifestyle: People with risky careers or that engage in risky hobbies pay more.
Work-Provided Life Insurance Isn’t Usually Enough
Many employers provide life insurance. This is called group life insurance.
In addition, some insurance carriers allow plans to be purchased without a medical exam if you are under the age of 50 and healthy.
As a parent, buying life insurance early also protects your children financially earlier in their childhood. These plans also may not fully cover your family’s financial needs because they usually cover one or two times your annual salary. This could leave your family vulnerable within a year or two of your death. It is true that you can usually purchase additional coverage at a group rate to protect your family for a longer period of time. However, most employer-provided policies are not portable so if you were to lose or switch your job, you would also lose this life insurance.
Should I Buy Life Insurance for My Child?
The decision is ultimately up to you and what you can afford. However, there are a number of reasons why you might want to also purchase life insurance for your child.
If you’re a veteran, you may also be able to buy life insurance through the VA’s life insurance program. Not only can these plans help you pay for their funeral and other related expenses in the event of their untimely death, but they can also be an investment in your child’s future. Most children’s plans only cover your child until the age of 18 or 21. At that point, they can be automatically switched over to an adult policy without an application, requalification, and regardless of their health. This can help you guarantee your child has life insurance in adulthood—and your child can always purchase additional coverage when and if they want to from there. Children’s life insurance plans can also be an investment in their future. Most plans offer a cash value—which is basically a savings account that builds up with a portion of the monthly premium you pay. Then, once the policy ends at the age of 18 or 21, your kids can use the money to pay for college, buy a house, start a business or pay for another life expense. They can also borrow against it. Child life insurance plans are generally more affordable than an adult plan, with premiums as low as $5 to $10 in some cases. However, some families choose to instead purchase other savings plans, such as 529 college savings accounts, as an investment in their children—and that’s perfectly okay.
A Note from Verywell Family
As a parent, buying a life insurance plan for yourself (and your co-parent or partner) is one of the best ways you can guarantee that their family is taken care of financially in the unexpected event of your death. While this is an added expense to your family budget, the benefits more than pay for themselves over time because they provide parents peace of mind.
