How to Find the Right Life Insurance Policy as a New Parent

As a new parent, your life has changed drastically for the better. With the arrival of your little one, you now face new joys, responsibilities, and, undeniably, worries. Beyond sleepless nights and diaper duties, you may find yourself wondering what would happen if one day you pass away, and your family would have to fend for themselves without you. This is not a thought most people like having, but with the new addition in the family, it becomes even more critical to consider a life insurance policy. This decision, though daunting, is essential for ensuring your family's financial security long after you’re gone.

Navigating the endless options of life insurance is overwhelming, especially amid the crazy change it is to become a parent. To simplify your journey, this guide highlights three key factors to consider as a new parent when selecting a policy.

1. Assess Your Coverage Needs

Finding the right life insurance policy begins with a clear understanding of your coverage needs. This step can seem the most variable and confusing, since it requires a comprehensive evaluation of your financial responsibilities and future aspirations. However there is a simple rule of thumb when picking a number. Choose a coverage amount that is 10-20x of your current yearly salary.

The logic behind this is very simple; how many years do you want your family to be financially supported after your passing. If you're a new family, you might want to consider 15-20 years of coverage, whereas if your dependents are older, 10-12 years might make more sense. This is the best start to understanding how much you need.

Once you get the above number, you can start fine tuning it, if you like, depending on your family’s financial obligations or future goals. This includes:

- Debt and Expenses: Add up your outstanding debts—mortgage, student loans, credit card balances—and include everyday expenses like childcare, education, and daily living costs.

- Future Expenses: Think long-term. Will you need to fund college tuition for your children? Factor in these future costs as they will affect your coverage needs.

Once you use the tools above to determine a coverage amount, it's time to determine what policy type is best, so you can avoid overpaying for unnecessary coverage.

2. Choose the Right Type of Policy

Life insurance policies generally fall into two categories: term life and permanent life insurance. Each type has its pros and cons, so understanding the distinction is vital.

Term Life Insurance

Term policies, as the name suggests, provide coverage for a specific time period—typically 10, 15, 20, or 30 years. They are often the most affordable option, making them ideal for new parents who may be stretching their budgets. Here's what you need to know:

- Affordability: Term policies offer high coverage amounts at lower premiums, basically getting a lot more for way less.

- Simplicity: Term life insurance is straightforward; if you pass away during the term, your beneficiaries receive a death benefit. If not, the policy simply expires.

Best for: Families looking for a cost-effective way to secure a financial future during the child-rearing years.

Permanent Life Insurance

Permanent life insurance offers coverage for your entire lifetime, as long as premiums are paid, and includes a cash-value component that grows over time. However, it comes with higher premiums. Here’s why some parents might choose this option:

- Long-term Security: Permanent life insurance ensures that your loved ones will receive a death benefit no matter when you pass away.

- Cash Value Accumulation: A portion of your premium builds cash value, which you can borrow against in emergencies or use as an investment.

Best for: Parents looking for lifelong coverage and an investment component, willing to pay higher premiums for more comprehensive benefits.

Ultimately, the decision hinges on your family’s unique financial situation. If you're just starting out and balancing the costs of raising a child, term life might be your safest bet. If you have more complex financial goals and can afford the higher cost, permanent life insurance might better fit your needs.

3. Examine Policy Riders and Additional Benefits

Once you’ve settled on the top two, you're basically 99% of the way done. The rest is nitpicking by considering various policy riders. Riders serve as additional benefits that can enhance your policy’s protection without completely changing the policy. Here are a few notable ones to definitely consider:

- Child Rider: This allows you to add coverage for your children at a lower cost. This way, if something were to happen to one of your children (something no parent wants to think about), you would have the financial resources to help cover funeral costs or other expenses. (Usually gives a payout from $10,000-$100,000)

- Accelerated Death Benefit Rider: Should you be diagnosed with a terminal illness, this rider enables you to access a portion of the death benefit while you're still alive, aiding in medical bills or related expenses.

- Disability Waiver of Premium Rider: If you become disabled, this rider can waive your premium payments, ensuring your coverage continues without financial strain.

-Critical Illness Rider: Should you be diagnosed with a critical illness, this rider lets you take a portion of the death benefit as a cash payout upon diagnosis of a covered serious condition (such as cancer, heart attack, or stroke) to help with medical costs or lost income.

My favorite rider of the above is the critical illness rider, because it's very practical. Let me give you an example. Let's say you took out a term life insurance policy at age 30, for 20 years. It's year 19 and you're almost at the 20 year mark about to turn 50, but you received a cancer diagnosis. Chances are that if it's not terminal, you'll still have a long life ahead of you, but your policy is going to expire at the 20 year mark. If you execute the critical illness rider, you'll get a portion of the death benefit paid out to you, and you can do whatever you want with that money. It makes having a term policy that expires more worth it. You can actually make use of the death benefit payout without dying.

My Take: Take Control of Your Family's Future

Choosing a life insurance policy as a new parent may feel like a difficult task, but breaking the process into manageable steps enables you to secure your family’s financial future confidently. Start by assessing your coverage needs, choose the policy type that aligns with your situation, and explore riders that can enhance your protection.