Category Archives: parenting

New Parents: Get Some Life Insurance!

Sam the Man

It’s a boy!  My wife gave birth to a boy on September 30th.  We named him Samuel, and he’s awesome!  He’s just starting to interact, smile and make all kinds of noises. 

Over Thanksgiving weekend I bumped into an old friend from high school at the Verizon store.  It’s been a while since we’ve seen each other and after exchanging pictures of our kids and a few bad jokes, we caught up on each others current lives.  

He gave up on getting discovered in Hollywood, worked his way up to a management position at a technology firm, settled down, and has 2 ‘trouble making rugrats’ (his words, not mine). 

Upon learning that I am an investment advisor, he mentioned his desire to save for college and asked me if there is anything else he should be doing as a parent.  I asked him how much life insurance he had and he just shrugged. 

What!? 2 kids and no Life Insurance?  Seriously?  

The first thing any parent needs to do is to buy life insurance.  PERIOD.  There’s no question that kids are expensive; diapers, clothing, cribs, formula…the list goes on.  For many people, budgets are tight and nobody wants another expense. 

But the most important thing you can do is protect your family, and in case you don’t know, Term Life insurance is pretty cheap.  You might not be able to afford as much as you want, but you must get something.  Anything is better than nothing. 

Alright, enough preaching…There are several important things to determine when buying life insurance.  

Here is the quick life insurance buyers guide to help you decide what is right for you: 

How much to buy? 

The first and most important thing to do is determine your needs.  Do you have a mortgage?  If so, this is the minimum amount of insurance you want to have.  Next think about costs to raise a child.  According to the US Department of Agriculture the average middle income family will spend $291,570 to raise a child through age 17 (as of 2008).  Additionally, many parents want to provide college tuition, which raises the average to $319,270 (assuming a 4 yr. public university). 

Your Budget.   

Know your budget.  DO NOT buy more insurance than you can afford.  If you haven’t created your own budget yet, get on it!  Start here:  Budget

Keep it simple. 

My advice when it comes to insurance is to get as much as you need for as little as possible.  If you are buying life insurance, it should only pay off if you die.  Insurance policies usually offer add-ons called riders that appear to make the policy better.  For example, some term policies have additional options that can return money to you if you don’t die within the term.  You are paying more for this privilege.  

Term or Permanent? 

A term policy will insure your life for a specific period of time.  Term insurance is like renting a home; it’s cheaper than buying and as long as you pay on time, you will have a place to live…but you don’t own the asset.  Typical terms are 10 years, 20 years, 30 years.  This will be the cheaper option, however, you need to get new insurance at the end of your term (i.e. 10 years from now)  You will be 10 years older which makes insurance more expensive, and there is a risk that your health has deteriorated to the point of non-insurability.  

Permanent insurance will not expire, provided you pay your bill on time, every time. Permanent insurance is like buying the home; it will cost you more but have some other additional benefits.  There are different ways to structure this that will allow you to have a variety of different features such as investment components, cash values, or something similar to a term policy for life.  Whatever you decide, my advice is to make sure that it is guaranteed to pay your minimum benefit regardless of any assumptions. 

Evaluate The Insurance Company 

Take a look at the insurance company ratings.  Any quote should show you the company’s financial snapshot, including assets vs. liabilities; their ratings from agencies such as Standard and Poors; and a Comdex score.  Always compare at least 2 insurance companies. 

Justify It 

Your kids depend on you.  Instead of upgrading your flat screen TV this year, take comfort in the fact that you are protecting your family.  Plus, you will score bonus points with your wife when she finds out how responsible you are. 

Personally 

One month before Sammy was born, I applied for a 20 year term policy, without any riders, for an amount that is the amount of my mortgage owed plus the average cost of raising a kid and paying for college (approximate).  I figure that by the time junior is 20 years old he will be able to fend for himself.  If I get hit by a bus before that, Annie won’t have a monthly mortgage bill, and she can pay for daycare too.  I wanted as much as necessary for as little as possible, so I can still afford diapers, and formula, and the college savings account that I just opened…but that’s a conversation for another day. 

For more details, check out the NAIC Consumer Guide

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Filed under advice, investing, life insurance, parenting