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Life insurance for new parents
Before you make the big step, protect yourself with life insurance for new parents.
Guides
If you're expecting or have just had a baby, life insurance is a necessary expense now that you have someone relying on you. With so much added responsibility, it can provide peace of mind, knowing that your family is taken care of if the worst happens.
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What should new parents consider when taking out life insurance
As a new parent, you have many more financial responsibilities so it's important to consider the following when taking out life insurance.
- New expenses. Child care is the most obvious new expense you'll have to take into account when you have a child but there are lots of other things, like food, education fees and other general utilities costing you more than before. You may also have mortgage payments to make. Consider all the things you currently pay for and add them up. Life insurance can pay for all of this if you die or become terminally ill.
- Consider having your policy go into a trust fund. If you're just having your first child, it may be worth arranging to have your life insurance policy go into a trust fund that your child can access when they reach a certain age. This can be arranged with your insurer and bank.
- Temporary financial relief. If you're the main breadwinner, it may also be smart to take out income protection insurance. This can pay you 75% of your income if you need to take some time off work because of an illness or injury. It can also cover you for involuntary redundancy. What's helpful is that unlike life insurance, which pays out a lump sum when you die or are diagnosed as terminally ill, it pays you in monthly instalments, like a normal salary, so you can continue to pay the bills and put food on the table until you're back on your feet.
- Funeral expenses. Funerals can cost anywhere from around $4,000 to $15,000. Make sure you factor this into the amount you need when taking out a life insurance policy. Lots of insurers will pay you a funeral advancement benefit of up to $10,000.
How much life insurance should a parent have?
This depends on a number of factors like how much you earn (and are therefore financially relied upon) plus your age (how many years of work you have left). Generally though, it's recommended that your life insurance lump sum – the money your beneficiaries receive when you die or become terminally ill – is around 10 times the value of your annual income. So if you earn $100,000 a year, you'll want a $1 million life insurance payout.
Remember though, this isn't a one-size-fits-all kind of situation. You need to take into account all of your expenses and bills when calculating exactly how much you'll need to leave behind for your family. This can include:
- Mortgage or rent payments
- Everyday expenses, such as groceries and utility bills
- Your child's future education, like tuition fees
- Car expenses, including insurers, repair and other travel costs
- Funeral expenses
- Credit cards and any other loans
- Other luxuries your family are used to
Do both parents need to take out life insurance?
You don't need to, but it's probably a good idea. Even if only one of you works, it's still smart to have a life insurance policy. This is because while you may not earn an income, you save your household thousands of dollars a year in child care expenses, babysitter costs and more. If you were to die, your partner would most likely need to employ someone to look after your child while they continue to work.
If you're only interested in getting one life insurance policy though, then go with the breadwinner. But remember to still take into account those extra costs, like child care, that the stay-at-home parent currently takes care of.
Other types of insurance to consider
Life insurance, sometimes referred to as death cover, isn't the only insurance option worth taking into consideration if you have a child to care for. Take a look at what else may be a good idea for you:
- Income protection. An income protection insurance policy can pay your salary for you if you get sick or injured and need to take some time off work. For instance, if you injure your back inside or outside of work and can't do your job for a while, it can make sure you're still able to pay for important expenses like your child's school fees, your rent or utilities and continue to put food on the table.
- Trauma cover. This is a really financially helpful type of insurance which pays you a lump sum if you're suffering from a serious illness or recovering from major surgery. You can spend the money how you want; to pay off your mortgage, buy mobility equipment, pay for medical expenses – anything that eases the financial burden for you.
- TPD. Total and permanent disability (TPD) insurance is for if you become permanently disabled and can't work anymore. It's like the next step up from income protection insurance, which covers you if you're temporarily unable to work. It also comes in the form of a lump sum payment and can help you pay off any debt you have or any immediate medical expenses.
Are there any benefits for your child?
Yes. Here are some of the perks of a life insurance policy:
- It's tax-free. Unlike many other types of savings or incomes, life insurance benefits are tax-free. That means if you have a policy that will pay out $3 million, your child will receive $3 million exactly.
- It can pay for the funeral. It may not be something that's likely to happen anytime soon, but when you die, you don't want to be a burden on your child. Life insurance policies often provide an advance benefit so that your child, hopefully an adult by then, doesn't have to fret about funeral costs.
- Cash value. Some policies have a cash value. This means that a portion of the paid premium is set aside and can either accumulate interest or be invested in the market. You can borrow from that cash value, surrender your policy and collect the cash or leave it to your child.
- You're helping them out even after you've gone. It's nice to know that even after your death, you're able to make your child's financial life a little easier to cope with.
Bottom line
Having your first child is the biggest step you'll take in your life and it pays to be prepared. A life insurance policy is one of the best ways to financially secure your family's future and provide peace of mind. Even if the worst happens, it's good to know your family can continue to live the life you've built for them.
Frequently asked questions
When should I get life insurance?
Generally speaking, the younger the better, as you're less likely to have health conditions so your premiums will be lower. But it's also good to take it out when you're approaching a new stage in life, like buying a home or having your first child so that your policy is equipped to deal with your expenses.
Can I change my policy if I have more children?
Yes. You can call and update your policy whenever your needs change. Your insurer will adjust your premiums to reflect any changes.
Should I name my child as the beneficiary?
Your beneficiary is the person or people that you nominate to receive your life insurance payout. Since it's your first child, it's a good idea to nominate someone else, like your partner, as if the beneficiary is still a minor when you die, your life insurer can't pay them until a guardian is appointed. You can have more than one beneficiary.
