“Life insurance protects a family financially,” says Paul Graham, senior vice president of policy development at American Council of Life Insurers.
If you’ve put off this task, you’re probably not alone. After all, it’s not pleasant to think about worst-case scenarios, your own mortality, and the addition of yet another expense. But it’s worth noting the cost of a policy may be far lower than you anticipate, says Graham, who notes that according to LIMRA, a market research firm, millennials overestimate the cost of life insurance by five times its actual amount. “The fact is, it is possible to find a life insurance policy to fit within just about anyone’s budget,” Graham says.
Here’s what parents need to know, and how to get started procuring life insurance.
Why Parents Need to Prioritize Life Insurance
“Anyone who has somebody else depending on their income needs life insurance,” says financial expert Jean Chatzky, author of Women with Money and host of the weekly podcast HerMoney.
“Think about life insurance as income insurance,” Chatzky says. “If you were to die, who’s going to be in trouble because your salary or your income is no longer there?”
With life insurance, your beneficiary—most likely, your child’s other parent or a trusted guardian—will receive a payout, known as a death benefit, if you die.
This money can cover the basic monthly expenses (think: after-school programs, grocery bills, and so on), allowing your family to maintain their standard of living, Graham says, along with paying the mortgage bill or monthly rent at your current home. Plans can also help send kids to college, he notes.
But keep in mind what makes sense for one family, might not make sense for yours. “Everyone’s financial situation is unique, and everyone’s life insurance needs are different,” Graham says.
What’s the Right Insurance for You?
As a parent, your best bet is to get life insurance right away—that means before your baby is born, or immediately afterward. “You want to make sure that the need is covered when it exists,” Chatzky says.
Plus, this is one task that rewards youth and good health. “Life insurance gets more expensive as you get older,” Chatzky says. And if you develop a health condition, it can be harder—and again, more expensive—to get insurance, she adds.
Parents can choose between two categories of life insurance: permanent or term (that’s short for “terminate”).
With term insurance, you’ll be covered for a set period of time (between 0 and 30 years, according to ACLI)—the policy will pay only if you die in that timeframe. After the set time period, there is no payout.
Permanent life insurance, by contrast, will give you lifelong protection—as long as you continue to pay the premiums, your beneficiaries will receive the death benefit. There are several versions of this type of insurance available, depending on your particular needs.
Generally, Chatzky recommends term insurance, which is far cheaper than permanent.
“In order for people to get as much insurance as they need, [term insurance is] often the only affordable way to do it,” she says.
Plus, she notes, remember the whole point of getting this insurance: to cover your income. Once your income is no longer essential to your family’s way of life—for instance, 25 years down the road, when your kids are out of college and the mortgage is paid off—you no longer need the coverage of term insurance.
That said, some parents will always have a need for insurance, Chatzky says. If there’s someone in your life who will depend on your financial support for your entire lifetime, such as a child or sibling with special needs, permanent insurance makes sense for you, she says. You can also use permanent insurance to leave your kids money in your estate, she notes.
What if you want or need permanent insurance, but can’t afford it? “You can start with term insurance and then convert it to permanent insurance in most cases,” Chatzky says—just make sure your insurance policy provides an option to convert.
Avoid Two Common Pitfalls of Procuring Life Insurance
One of the biggest mistakes experts see parents make is only covering the parent who’s in the workforce and receiving a paycheck. Don’t downplay the work stay-at-home parents do—and the expense it would require to cover it.
“If you’re the stay-at-home parent and if you were no longer there, someone would have to be hired and paid, then you also need life insurance,” Chatzky advises.
Quantifying the amount may be easier for parents in the workforce, but that doesn’t mean it’s the only work that needs to be covered. Take some time to tally up the costs of the many responsibilities covered by a stay-at-home parent. “Cooking, cleaning, caring for children, transporting them to and from school and recreational activities, and the many other tasks performed by a stay-at-home parent cannot be easily replaced,” says Graham, noting that Salary.com estimates the median salary of a stay-at-home mom at a whopping $162,000 per year.
“People should think very seriously about ensuring a stay-at-home parent has coverage,” Graham urges.
Neglecting coverage for nonworking parents isn’t the only pitfall out there. It’s also important to evaluate company-provided life insurance, too, Graham says. Typically, it pays a death benefit that’s equal to one or two times your annual salary, he says. “However, some experts recommend that people’s life insurance coverage should equal ten times their annual income. Needs could be higher or lower depending on a family’s situation,” Graham says.
How Much Insurance Do You Need?
Figuring this out comes down to doing some math and thinking through both your current and future financial situation—to help, you can search online for life insurance calculators.
The biggest considerations to keep in mind are:
1. How much debt do you have? From repaying credit card bills to mortgage payments, your survivors will be on the hook to pay them off.
2. What’s your income, salary, or the cost to replace services you provide? As noted above, this math is easier if you make a set salary. Multiply this amount by the years of coverage you’ll want. For stay-at-home parents, consider the annual costs of replacing their work.
3. How long do you need the coverage? Do you want the coverage to extend until your children are through with higher education, or just until they’re 18? Will you feel comfortable timing the coverage to terminate when your mortgage is paid off? These are the kinds of questions you’ll need to think through.
4. Are there other expenses you want to cover? If you want to cover big expenses—such as your child’s college education—factor it into your coverage amount.
Feeling overwhelmed? There’s no need to go it alone. You can reach out to friends and family for advice. Professionals can also help you make your decision. “A life insurance agent or financial advisor has the knowledge and expertise to help consumers determine what level of protection is right for them,” Graham says.
The most important thing is not to let distaste for thinking about your mortality—or an aversion to doing the thinking and math required to determine the right policy for you—stand in the way of getting covered. As Graham says, “Life insurance is a critical part of a family’s financial wellness.”
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