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A New-Parent's Guide to Life Insurance
Part 2-of-3: new-parent financial checklist
Bryan Hasling, CFP®
April 04, 2024
Part 2-of-3 of the new-parent financial checklist
When you have a young family, or are planning to have one soon, getting life insurance is usually at the top of your adult to-do list.
But with all the different types available, and wide choices available, you may be wondering…
How much coverage am I supposed to buy?
How much would it cost? Where would I buy it?
But once some basic questions are answered, I promise, the process is easier than you might think.
In this piece, I'll help answer the exact framework my wife and I used to get our own coverage this year.
Life Insurance Topics
[Start here] Do I need Life Insurance?
Only get life insurance when you have an insurance need.
This means someone depends on you financially. For most, this means children or a spouse. It can also be various family whom you support.
If you don't have a life insurance need, then you may stop here.
What type of Life Insurance should I get?
There are a couple main types - term versus permanent - but in my experience, Term is right for most families (or, at least, 99% [not an exact %] of the families I’ve ever worked with in my career).
For today's purposes, I will focus solely on "Term" life insurance.
It is also the type my wife and I are personally getting right now, before our son is born this summer. So I have first-hand experience to share.
> What's the main difference between Term and Permanent Life Insurance?
Term is straightforward:
It is an easy, uncomplicated way to get a lot of coverage affordably. For most healthy people, we're talking pennies-on-the-dollar.
You choose a 'term' (length of years) you'd like to lock in the coverage for.
Permanent is more complex:
It blends insurance & investments, and requires higher premiums to keep the lights on.
You may see titles like "whole life, cash value, IUL, universal life, or permanent”.
In my career's experience, there are limited situations where permanent policies make sense.
You have a 'cash value' that you can generally carry into your older years. And over time, it can be ‘paid up’ where it can stay in-force even if you stop paying.
But the devil is in the details, and that's a wider, complex topic for another day.
How much coverage do I need?
There are semi-scientific formulas out there, but I use a broad framework.
In general, you may want to get coverage so your family can maintain their current lifestyle, even if you no longer there to earn income for them.
Essentially, you are protecting your future years’ income.
For this first layer, most people aim to cover their mortgage balance, plus leave an extra cushion to pay bills during a transition period.
Personally, I’d want my wife to not have to worry about mortgage payments, plus have the freedom to take time off work if she so pleases. And vice versa, I’d want that same option.
Additionally, it can be wise to obtain even more coverage to get ahead on future family goals. Think far off, like college education(s) for your children, or even extra amounts for their future home purchases, weddings, etc.
How much does Term life insurance cost?
Each insurance companies will look at these 3 items:
A) the coverage amount
B) the term length (in years)
C) your physical health
By far, the biggest variable in pricing, besides the actual amount you're applying for, is how healthy you are (or aren’t).
Simply put, healthy people have a lower probability of passing away early. Which means a low chance of the insurance company paying out big. And because of that, healthy people get the lowest rates.
As a personal example: my wife locked in a 30-yr, $1M term policy at age 29 for about <$30/mo (plus a discount for paying annually). Very affordable.
How long should my Term be?
This is also an 'It Depends' moment. But most people aim to keep coverage throughout their peak-earning years. Or at least until their biggest liabilities (mortgage) are taken care of.
In general, it's better to lock in a longer-term and rate while you're young (and healthy). You can always choose to stop paying in future years once you don't think the coverage is necessary anymore.
Importantly, once you get Term coverage, you are locked in to your contract.
So if you start a term policy in January, and you are diagnosed with a serious health issue in February, your rates will generally stay locked in throughout the full term.
Where should I purchase a policy from?
Term insurance is available from almost any insurance provider you know.
My general preference is to work with a Broker who can shop across multiple carriers - as opposed to ("captive") agents who can only help you shop at the company they work for.
If given a menu of options, you simply want to check the Credit Rating (financial strength) of the companies. From the strong options, simply choose the lowest premium payments and you're set.
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