What All New Parents Should Know About Life Insurance

Sean McGinn is an assistant director of Product Positioning in the Insurance Solutions department at Northwestern Mutual.

Setting up a nursery or stocking up on diapers may seem like the biggest priority for many soon-to-be parents, but there are important financial steps, too. After all, many parents would say that raising kids is incredibly rewarding—and surprisingly expensive. And one of the most important financial steps is protecting your growing family with life insurance.

Why should new parents get life insurance?

Choosing a life insurance policy may not sound like the most urgent baby prep task. But getting coverage in place can give you peace of mind that your child will be provided for if something were to happen to you or your spouse. Life insurance protects your family financially, which is why it’s a critical part of financial planning for new parents.

Choosing the right amount of death benefit

One of the first things you’ll want to figure out is how much life insurance you’ll need. In other words, how much death benefit would your family need if you were to die tomorrow? The death benefit is money your family members might use to pay for the mortgage, daily living expenses, college, weddings and maybe even help with your spouse’s retirement.

You can get a sense of what you might need from online calculators and some general guidelines. One common rule is to get a death benefit that’s 10 times the annual salary you’re trying to replace. But this is just a starting point. The right amount of life insurance for you depends on your income, how much debt you have, the amount of your savings and investments and the costs of raising your dependents.

Which types of life insurance are best for new parents?

Just as options abound for cribs, strollers and all other baby things, life insurance also comes in different shapes and sizes. In general, life insurance policies typically fall into two buckets: permanent life insurance and term life insurance. The most important difference when thinking about term vs. permanent life insurance is that with a term policy, coverage lasts only for a set number of years but is less expensive.

The basics of permanent life insurance

A permanent policy will pay a death benefit someday regardless of when you die (provided you pay the required premiums). In addition, it accumulates cash value, a potential source of funding that could become an important part of your overall financial plan throughout your life. Because of this, permanent insurance tends to have a higher premium than a term policy with the same death benefit. But it also creates flexibility down the road and will never expire. There are two main types of permanent life insurance:

• Whole life insurance, often recommended for growing families
• Universal life insurance, which could be a good addition to your financial tool set if your household income varies year to year

The basics of term life insurance

Term policies appeal to a lot of parents because of their affordability. Term life insurance provides coverage for a certain amount of time, called a “term,” so it doesn’t provide the lifelong coverage of permanent life. There are two main types of term life insurance:

• With level term life insurance, you pay the same premium for the length of the policy, such as 10 or 20 years. You choose a term that works for you, and you can plan out your budget knowing the premiums won’t change. This type of policy might be called something like “Level Term 10.”
• Annually renewable term life has premiums that increase over time. When you’re young, annually renewable term tends to be the most affordable type of policy, but the premiums become more expensive. This is often best when you’ll need insurance for a long time because it gives you the most security and flexibility in your coverage options.

As you get older, the benefits of permanent life insurance—such as the ability to build stable cash value and leave a legacy—may be more appealing. Rather than buying a completely new policy, people will often use a term conversion to move from term insurance to a permanent policy.

Life insurance can enhance your long-term financial planning

Think about life insurance as one of your financial tools. It can work with other tools to help you reach longer-term goals like buying a house, starting a college fund and beginning to invest. In fact, insurance, investments and annuities can be considered in a single vision for your future called a financial plan.

And research from EY—an international tax, accounting and consulting firm—shows that properly allocating your money across investments, permanent life insurance and annuities¹ makes you more likely to achieve better outcomes in retirement and leave a larger legacy than through investments alone.

Should parents get life insurance for their children?

Yes, you should also consider a policy for your child. (You can even get coverage for a baby.) While it can be easy to think there’s no reason to get life insurance for your children, or that it’s too uncomfortable to think about, it can actually give them a financial head start.

Here are some reasons parents get life insurance for their children.

• It protects their insurability: Buying permanent life insurance for healthy children at a young age gives them a financial head start. It locks in a low premium for them, and it avoids the risk that they’ll be disqualified from getting a life insurance policy if they later develop a chronic disease or go into a hazardous line of work. On some policies, you can even add a rider that allows the child to add more insurance in the future without spending time on underwriting.
• It allows them to grow cash value: Some types of life insurance build cash value that’s guaranteed to grow over time, tax deferred. Doing so can build a financial safety net that your children could access during their lives. Some people borrow against the cash value to help pay for a wedding or make a down payment on a house². For the rest of their lives, your kids will be able to count on the policy’s death benefit, cash value and the lower-cost premiums you established for them.
• It offers a death benefit: If the unthinkable were to happen, your child’s insurance policy could give you the chance to grieve without having to rush back to work. If you were to lose your child, their insurance policy would not only pay for funeral expenses. It could also give you the flexibility to take all the time you need.
• Your kids will experience faster underwriting: Life insurance usually requires a check into the medical status of the person being insured. This is called “underwriting.” For children, this is usually simpler and faster compared with adults.

Make strategic life insurance choices for your family

Because of its affordability, many new parents start with a large term policy (to get the death benefit they need) plus a smaller permanent policy. That way, they begin to take advantage of the additional benefits permanent life insurance offers. Down the road, it’s possible to convert portions of the term policy to a permanent one.

Life insurance—particularly a permanent life insurance policy—is just one piece of a larger financial plan. Your Northwestern Mutual financial advisor can show you how it will reinforce other financial tools, like investments, as you work toward your family’s goals.