The only thing we can count on in life is change, but some changes that are more significant than others! Having your first child is one of those – for the first time you become completely responsible for another person’s life!
When you become a parent, you really should be considering life insurance. Life insurance isn’t for you, it’s for the people you might leave behind. As a new parent, that little person could be in your arms right now.
What is the best life insurance for young parents? Life insurance is complex, and there are as many life insurance products as life insurance companies. We’ve broken it down for you below.
(Here’s an article on buying life insurance for your parents, if that’s what you’re after)\
What is the best life insurance for young parents?
There’s no single best life insurance policy for parents, because everyone is different. However, some life insurance policies are better suited to new or young parents. A 20-year term life insurance policy will at least cover your child until they get out of high school, for example.
To better understand which life insurance policy will best suit your new family, it’s worth going through the main types of life insurance coverage available.
Who is insured, and who benefits?
First, it’s important to figure out who is being insured, and who will be the beneficiary of the policy. This isn’t complicated, but it’s important to think about.
The ‘life insured’:
Aka, whose death will trigger the payout? This will generally be you and/or your partner, if you have one. If you have a partner but only one of you is earning a salary, you might want different levels of coverage. The working parent’s policy needs to cover the loss of their salary, while the loss of a stay-at-home parent – while equally devastating – may have a lower financial impact. There’s also the option of insuring your child.
The beneficiary is the person who receives the payout. If you’re a single parent, your child will be the beneficiary, but the money will normally be put in a trust until they’re an adult. If you have a partner, they will typically be the beneficiary, but you have the choice of listing your partner and child as co-beneficiaries.
Term life insurance for parents
Term life insurance is the simplest form of life insurance available. You select a term (eg. 10 or 20 years) and a coverage amount (eg. $100,000). Your insurance company will set your premiums based on factors like your age and health. As long as you pay your premiums, your beneficiaries will receive the coverage amount if you die within the term.
What term should you pick?
If you take out term life insurance as a parent, the term of your policy should cover the amount of time you want your child covered for. If you want them to be supported through college, you’ll need to make sure your term lasts until they’re in their early twenties.
How much coverage do parents need?
How much coverage you need is totally individual, taking into account your income, debts, preferences, the tax implications of your death, plus many other factors! As a parent, your life insurance should at least cover your debts, any costs your death will incur (eg capital gains tax and funeral costs), plus a certain number of year’s worth of your salary to support your family. We have a full article that can help here – How much life insurance do I need?
Decreasing death benefits:
One way to reduce your premiums is to purchase a policy with a decreasing death benefit. While the cost to support your child from today until college might be $500,000, in ten years time the required coverage might only be $250,000. A decreasing death benefit reduces your coverage each year, in return for a reduction in premiums. That means you’ll only be covered for the amount you need, and you’ll pay less for it.
Whole life insurance for parents
Whole life insurance is a kind of ‘unlimited term’ life insurance policy. It’s guaranteed to pay out eventually, so the premiums are much more expensive than a comparable term life insurance policy. There are other benefits however, including an investment component that can actually build wealth. There are also opportunities for tax deductions.
The trouble with whole life insurance is the benefits are only really worthwhile once you’ve maxed out your tax deductible RRSP and TFSA contributions. To do that, you’re going to need to be earning well into the six figure range – that rules out most new parents that we know!
If whole life insurance sounds like something you’re interested in, you can learn more here.
Joint life insurance for parents
A good option for families with two parents is joint first-to-die or combined life insurance. Either of these can reduce your premiums, but there’s a big difference between them.
Joint first-to-die life insurance:
Joint first-to-die life insurance covers both you and your partner as a single ‘life insured’, with a single term, coverage amount, and premium. If one of you dies, the entire policy is paid to the surviving partner and the policy is terminated. Many policies will offer continued coverage for the surviving partner without the need to be reinsured or get a medical check – generally there’s a 30 day window before this offer expires.
Joint first-to-die will generally insure you at a slightly higher ‘combined age’ than your average age, which takes into account the additional risk of two people being insured. While your premiums will be higher than if you insured just one of you, they’ll often be cheaper than taking out two separate life insurance policies.
Combined life insurance:
Combined life insurance is really just a marketing term. It refers to when you and your partner take out individual life insurance policies with the same insurer, but only get charged one set of administration fees, which slightly reduces your premiums. Combined life insurance can be a better option than joint first-to-die life insurance when you and your partner need different coverage amounts, for example when one partner is the main income earner.
The best option is not always obvious, so it pays to do some research, compare quotes, or speak to a broker. Get started with a life insurance quote here.
Supplemental life insurance for parents
Finally, there’s supplemental life insurance. If you already have life insurance, either privately or through your employer, you can add a ‘rider’ to that policy to add any additional coverage you need for your new family.
Supplemental life insurance can simply be coverage for a larger amount (an extra few years worth of your salary for example) or for a specific cost, like coverage to pay for your funeral or to leave a trust fund for your child.
So, what’s the best life insurance for parents?
Term life insurance is generally the most suitable life insurance policy for young parents, as it covers the financial risk of your death while your child is still young. Choose a term that lasts the time you want your child to be provided for, and a coverage amount that will pay for whatever you want them to have access to – a college degree for example.
A joint-first-to-die policy may be a good option for couples, depending on your age. Generally, a joint policy lowers your premiums compared to having a policy for each parent, while still offering a payout for both of you. If you are one of the few new parents who is also a high net worth individual, then a whole life insurance policy could be worthwhile.
The bottom line
While we’ve tried to provide an actual answer to the question ‘what’s the best life insurance for parents’, there really isn’t a one-size-fits-all policy. Life insurance policies and premiums are incredibly individualized, perhaps more so than any other type of insurance. That means you won’t know what your premiums are until you actually shop around and get quotes.
Ratehub lets you compare life insurance quotes in one easy process. Just fill in some details and we’ll lay out all the options for you, from the dozens of providers with their dozens of products. Life insurance is complex, but the process of buying it doesn’t have to be.
The real bottom line is that whatever type of life insurance you choose, don’t put it off. The consequences of your early death will be devastating for your child, literally changing the course of their life. The sooner you take a policy out, the sooner you’ll be able to rest easy, knowing they’ll be provided for.