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Parenting turns you into a backup-planning pro. Ask me how I know to buy two extra of the cuddly toy my kid won’t sleep without. Or why it’s smart to bring a change of clothing for each child before embarking on a long car ride. Thinking about the ideal case and how to handle plan B (or C) is part of keeping up with kids’ changing needs.
The biggest backup plan, of course, is figuring out what to do if you or your partner isn’t around anymore. Along with your last will and testament, a life insurance policy is one of the most important tools to help provide for your loved ones if you pass away.
Let’s look at the specific questions, concerns and opportunities when it comes to life insurance for parents.
This question isn’t really about how likely you are to pass away. A better question to ask is who depends on you financially and might go without the things they need if you were gone.
“When your children are younger, your need to replace income is probably the greatest because you have kids who depend on you,” says Marguerita Cheng, Certified Financial Planner and CEO of Blue Ocean Global Wealth.
As soon as you become a parent, there’s a little person who depends on you completely. Life insurance is almost like the financial version of a car seat—you hope you’ll never need to put those crash-safety features to the test, but it’s good to know the protection is there. And just like you’d install a car seat in both parents’ cars, it’s smart to have policies in place for both parents, even if only one of you has a salary to replace.
“When we think about why we buy life insurance, we are providing resources for those we leave behind. It’s not just replacing your earned income,” Cheng says. “If someone is caring for kids… it’s childcare, helping kids with homework, running the household. It’s about the economic benefit you’re bringing to your family.”
Stay-at-home parents provide value to their household in terms of work they do at home (full-time, one-on-one childcare is worth a fortune!). They also provide stability and emotional support in a way that’s tougher to quantify. Generally, you can expect a non-earning partner to get approved for about 50 to 100 percent of the income-earning partner’s coverage.
One of the first decisions you’ll make about life insurance is what type of policy fits your needs best. Life insurance falls into two main categories: term life and permanent life insurance.
Term life insurance is active for a specific period of time, which you choose when you’re buying the policy. The idea is that you have coverage during the years when your death would have the most serious financial impact on your family (e.g., while your kids are young, or while you’re paying a mortgage on your home). If you outlive the term, you won’t collect any money from the policy.
Permanent life insurance comes in a few variations, but one of the most common is whole life insurance. Whole life insurance builds a cash value component along with providing death benefit coverage for your entire life. If your child has a disability and will need lifelong care, whole life insurance may make the most sense for you. Some families who have very large estates may also use a whole life insurance policy as a way to cover estate taxes.
The main advantage of whole life insurance is that it lasts your entire lifetime. A major advantage of term life insurance is it’s substantially cheaper for the same coverage amount.
“I think that in a perfect world, you would have both,” Cheng says. “I try to be efficient with [my clients’] resources. If cash flow is tight, I would say get term because you can have your cash flow for other priorities.”
How much life insurance you need varies from family to family. Some experts swear by the income replacement method of calculating coverage. With this model, you multiply your income by 5 to 10 to get an estimate of your coverage goal.
Other financial pros recommend a little more nuance. The “analyze your needs” school of thought suggests calculating your debts (including mortgage), how much you want to contribute toward college costs and the gap between your spouse’s income and household expenses, among other factors.
Your current finances, your plans for your kids’ future and your personal peace of mind are all important factors to consider when you’re deciding what coverage feels right.
Next up is how long you want to have that coverage in effect (if you’re considering a term life policy). The rule of thumb is to think about how long it will take to reach major goals. If your kids are little, a 20-year term might be best to cover you through their college years. Parents expecting to retire in 15 years or whose kids are already in middle school may be better off with a 15-year or even a 10-year term policy.
When you’re ready to start shopping for a life insurance policy, make sure you and your partner are on the same page about the type of policy and amount of coverage that makes sense. Sometimes, one partner is more concerned than the other about how premiums will fit into your family budget. Fortunately, life insurance can often be more affordable than people expect.
Premium rates vary depending on your age, health and lifestyle. A life insurance underwriter’s job is to assess details in your application and determine your risk. Smoking or working in a high-risk job (e.g., firefighter) can increase your risk and therefore premiums. If you’re young and in excellent health, those factors can help put you in a more preferred category.
The term and coverage you choose also affects rates, but for example, a 30-year-old woman in excellent health may pay as little as $13.71 per month for a 10-year, $100,000 policy. To get an idea of what your rates might look like, get a term life insurance quote for an estimate to set your expectations.
You may notice many insurance providers require a medical exam as part of the underwriting process. Usually, that means sending a medical professional to your house or office. If the thought of having someone in your home during a pandemic makes you antsy or arranging childcare would be tricky (or you just hate needles), there might be an alternate solution.
No-exam life insurance policies let eligible applicants skip the exam and answer health questions instead.
Nothing changes your body like pregnancy. Considering that your health (including weight) plays a role in how much you’ll pay for life insurance, you might wonder if you should even apply at all while you’re expecting.
In most cases, if you’re having a healthy pregnancy, you could still qualify for the same rates you’d get if you weren’t pregnant. Weight matters in your application, but underwriters generally consider your weight from before, during and after pregnancy to get a more complete picture. Certain postpartum health challenges (e.g., clinically mild PPD) might also have little effect on your rates.
If you’re having a more challenging or complicated pregnancy and dealing with health issues like gestational diabetes or preeclampsia, the insurance provider might put your application on hold to see if the condition resolves after you give birth.
You want your policy to protect your kids’ financial future. The problem is, minors can’t inherit in their own name. How do you make sure the death benefit money will really go toward your kids’ care? Choosing a life insurance beneficiary is an important decision to make sure your policy works according to your wishes.
Partnered parents often have the easiest time with the beneficiary line. Naming your spouse (or co-parent, if you’re unmarried but parenting together) is an easy choice for many people.
Other families have more complex arrangements to consider. If you have children from a previous marriage, you might want your ex to receive a portion of your life insurance benefit. Single parents often consider setting up a trust for minor children to ensure the money goes to their care.
If opening a trust now isn’t in the budget, Cheng says one option is to create a testamentary trust in your child’s name, which is only funded in the event of your death (so you don’t have to deal with the costs now). If your life insurance provider doesn’t offer testamentary trusts as a beneficiary option, Cheng says naming your parents or a trusted loved one who’s agreed to care for your children is a possible alternative route.
In the midst of all this life insurance shopping, you might wonder if getting policies on your children is a smart move, too. Taking out life insurance on your child could cover final expenses and make it easier to take time to grieve if the worst happens. Child life insurance policies also often include a guaranteed insurability clause, which might be appealing if your child is likely to have medical conditions that would make it difficult to qualify for life insurance as an adult.
For many families, though, building savings and protecting adults is enough. “If someone wants to buy a policy on their child because they’ve experienced loss in their community, I’d never say don’t do it, but the priority should be on [covering] the caregiver,” Cheng says.
You can change your beneficiary at any time, so it’s okay if you don’t have every last detail figured out. Choose someone you trust, and remember to update your policy if your situation changes, but you have the flexibility to adjust your beneficiary as needed.
Securing your family’s financial future is just as important as setting up the nursery or managing your kids’ extracurricular schedule—and the benefits of life insurance keep going long after onesies are packed away or piano lessons are dropped for robotics club. No matter what your next plans are for your family, a life insurance policy that’s based on your coverage needs and timeline can help you feel supported along the way.
Fabric exists to help young families master their money. Our articles abide by strict editorial standards. This article has been reviewed and approved by a compliance professional who is a licensed life insurance agent.
Fabric by Gerber Life exists to help young families master their money. Our articles abide by strict editorial standards.
Information provided is general and educational in nature and is not intended to be, and should not be construed as, financial, legal, or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. We make no warranties with regard to the information or results obtained by its use, and disclaim any liability arising out of your use of, or reliance on, the information.
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