A New Parents' Guide to Life Insurance
By Kristi Vaughan
Somewhere between waking for the midnight feeding and marveling over your newfound diaper changing skills, the realization hits: you have new responsibilities and you need life insurance!
But how much? Is there a "right" kind of insurance? Where is the best place to get it?
How much insurance?
As tempting as it may be to get as much insurance as you can possibly afford (this is, after all, your family you are protecting), there is a practical side to consider, especially with those other looming expenses, including a college education!
The primary purpose of life insurance is to replace income lost because of the insured's death and to provide a degree of financial security for surviving family members.
This is most commonly is done by ensuring that the insurance payout is large enough to cover immediate expenses and be used as the basis for a capital investment. Immediate expenses could include uncovered medical costs, funeral expenses and final estate-settlement costs. The remaining capital is then invested to provide an annual income for family members.
Most insurance companies recommend getting insurance equal to five to seven times your annual salary. To be more precise, grab a calculator or go to an interactive site such as that offered by the Life and Health Insurance Foundation for Education as well as most insurance companies.
In addition to mortgage and car payments consider such questions as whether your spouse will be working. Does your child have extraordinary medical needs? How about daycare or college expenses?
What is the right policy?
Life insurance comes in two basic forms: term and permanent.
Term insurance is bought for a specific time period and tends to be less expensive. This can be good for budget-conscious parents and to cover expected expenses such as college tuition or a mortgage. One caution on term insurance: rates likely will rise upon renewal and, depending on age and health, you may no longer be eligible for insurance.
Permanent insurance is more costly but as long as premiums are paid, you're usually covered for life even if your health changes. Permanent policies build up a "cash value" that you can borrow against, use to pay premiums or even buy an annuity for retirement years. Both term and permanent policies can be used in estate planning.
And policyholders aren't limited to buying just one or the other type of insurance. You might want to consider a combination of the two, especially during those years when college expenses and mortgages loom large!
Where can I get life insurance?
Most major life insurance companies have agents who will work with you. Additionally Internet search engines can help you locate web sites offering quotes from a number of companies. In some states you can even get insurance through your savings bank. And don't forget to check at work since many employers offer life insurance as part of a benefits package.