Life stage: Life insurance for new parents

By Maryalene LaPonsie on June 9th, 2011

Your world changes when your first child is born. Your child will depend upon you to provide everything from food and shelter to extras such as sports camps or dance classes. All that can add up to a lot of money, and life insurance could be essential to protecting a young family's financial stability.

Why life insurance matters for young families

LIMRA, an insurance research group, reports that nearly 7 in 10 households with minor children would be in financial jeopardy should the primary breadwinner die. In 2010, 11 million of these households had no life insurance coverage. Without life insurance, families may not be able to meet monthly financial obligations or save for future expenses such as college.

Life insurance can be critical to maintaining a family's standard of living, and replacing lost income isn't the only reason to purchase a policy. Marv Feldman, President and CEO of The Life and Health Insurance Foundation for Education (LIFE), cautions individuals not to overlook the need to insure a stay-at-home parent. "What is the value of all the services performed by a stay-at-home spouse?" he suggests new parents ask themselves.

That value might be more than you think, according to a study conducted by Penn Mutual Life. The insurance company determined a mother of a minor child is worth $44,913 annually. The figure includes the value of childcare, transportation and household tasks such as meal preparation.

Buying life insurance after baby

When it is time to buy life insurance, there are several methods to determine the level of coverage you need. Financial company ING recommends a death benefit of three to seven times your annual income as a good starting point for young, married couples with a mortgage and one child. Others advise adding costs such as funeral expenses and college tuition to income when calculating how much life insurance to buy. A life insurance calculator can also be helpful in determining the appropriate death benefit.

Life insurance comes in two forms: term insurance and permanent insurance. While permanent life insurance can provide guaranteed lifetime coverage, it is more expensive than term life.

"Most young people have so many obligations," says Feldman, "it can be difficult to purchase a permanent policy with the right amount of insurance coverage." He suggests that term insurance makes sense for new parents unless they are making a substantial income. In that case, permanent insurance, such as whole life insurance, can be an option for those looking to expand their assets.

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