Are You Making These Costly Mistakes with Your Life Insurance as a New Parent?

Becoming a parent brings with it many joys, but also a huge time constraint as well. We no longer have time to spend endless hours researching a topic to make sure we don’t make a mistake. This is especially the case when it comes to life insurance. Once that little one comes into your life, responsibility kicks in and a desire to protect your family’s financial future will start to develop. But where do you start? How do you spend the little time you have to learn a topic and make the right decision. It’s not a daunting task as it seems, and here we will go over 5 common traps to avoid when searching for life insurance.

1. The first common trap that most parents fall into is greatly underestimating coverage needs. Maybe you already have a policy from your employer and you think you’re set. Well, those policies typically only give you 1-3x your salary. So let’s say your policy give out $100,000, but your mortgage is $300,000. If anything were to happen to you, your family wouldn’t even have enough to stay in the house, and would ultimately have to move. Your families lifestyle would drastically change, and this policy doesn’t take into account future costs of education or other milestones your family might have for the children. Also, a side note on employer provided life insurance: it almost always ends once employment ends. So, when you’ll need it the most is when you’ll loose it. 

2. Another common trap that parents fall into is only covering the bread winner and not the stay at home parent. We tend to think that only the person making the money needs coverage, but try to add up childcare costs if the stay at home parent wasn’t around. Services like childcare, household management, transportation, and meal preparation costs approximately $117,000 annually. These are hidden costs that we don’t tend to think about, until it’s too late. Don’t secure coverage for just he bread winner. The stay at home parent provides invaluable services that would otherwise cost you an arm and leg if they were to pass away. 

3. A third common trap that most parents fall into is waiting too long to get coverage. Analysis paralysis is a real thing. With so many options, with so much to do, it can often feel overbearing and just easier to put getting coverage off for tomorrow. However, life insurance is one of those things that doesn’t get better with time. Life insurance premiums increase with time. Every year you wait is a 4.5-9% increase in cost. Also, when we’re young, we tend to underestimate health changes, but an unexpected health event might make you uninsurable. If you were to get diagnosed with cancer, that would make you uninsurable with most if not all carriers, preventing you from every getting coverage again. Don’t wait on it. 

4. A trap that is not so obvious and not considered by most parents is naming their child as a beneficiary of a policy. Now you may think that you’ll want the money to go to your child in the event of your passing, but this is not the case. If a minor is listed as the beneficiary of a policy, the court will have to get involved. The money will not be given to a minor, and the court will have to appoint a guardian to receive and manage the money. The child will only get the money at age 18 or 21, depending on state law. This can cause a couple of problems: the money can be given to an ex-spouse or relative that the parent didn’t intend to control the funds. There can be delays in distribution of the funds can lead to the stalling of payment of immediate bills. But possibly the most serious is that giving a large sum of money to an 18 or 21 year old can lead to misuse of the funds. It is better to designate a trust with distribution rules for the money, if you intend to name your child as a beneficiary rather than any other person.

5. The last trap that is very common among parents is DOING NOTHING! Analysis paralysis can stop you from getting even the basic coverage needed for your family. Not buying life insurance at all is the costliest mistake your family can make. Basic coverage now is better than perfect coverage never. Don’t let perfect be the enemy of good. 

Key takeaway:

Delaying the purchase of life insurance will not only cost you more every year you wait, but could greatly cost your family to suffer financially if you pass away prematurely.