Life Insurance Guide for Families With Children

It's never too early for a young family to think about buying life insurance. Lucky Business/ShutterStock

Taking care of your children’s needs means more than merely providing for them on a day-to-day basis.

Since no one knows what the future holds, preparing for their daily needs in your absence is essential. You can be ready for the possibility of an accident or death with a life insurance policy to provide for your family’s future.

Life insurance is a highly versatile instrument that can meet many needs. Those needs can and should be calculated and added into your planning when you decide how much life insurance you need and the type you buy. The need for life insurance is even greater if only one spouse is working.

Calculating How Much Coverage to Buy

Your young children have a whole life in front of them, and in the event of your death or disablement, those needs can continue to be met with life insurance, covering the cost of such things as medical care, child care, housing, daily sustenance (food and clothing), education (if in a private school), college, and more.

You also want to remember the bills—especially if you own a house or are buying one. If you want your spouse and children to maintain the same level of comfort they have now, then the insurance should be enough to pay off the mortgage, cover maintenance costs of your property for several years, and cover the annual property taxes. It should also cover any credit card debt and other loans that you may have.

The RamseySolutions website advises young married couples to get insurance coverage equal to 10 to 12 years of annual income, and to, when the beneficiaries collect it, take the proceeds from the policy and invest it. An investment earning about 10 percent interest should enable one to live off just the interest each year afterward.

Your Insurance Needs Drop After the Children Leave Home

As your children move into their teens, or get ready to go off to college, your needs for life insurance will drop as you won’t need as much coverage.

If you want to save money your children can use after they leave home, put the money in an investment instrument such as mutual funds, stocks, Certificate of Deposits, etc. The accrued interest will be considerably higher than what a cash value life insurance policy will earn.

Some families buy life insurance for their children. Shutterstock

Term Insurance Versus Whole Life

When you are young, you can purchase a lot of coverage with term insurance for just a few dollars. The same amount of money will only buy a fraction of an equivalent amount of insurance if you buy whole life. When buying term insurance, make sure that it is convertible to a whole life policy. Without this assurance, you may not be able to get affordable coverage if you drop the term policy.

Term insurance does not earn any cash value, which is one reason it is so cheap. It is insurance without any benefits. The premiums remain level for a set period of years, which could be 1, 5, 10, 20, or 30 years.

Whole life insurance earns cash value, but slowly, and not likely for the first three years. This type of policy could have some value if you should have need funds for an emergency, but if all you need is a savings plan, you will get better interest by investing the money.

Although you want to make sure that you have enough coverage, you also want to be careful to not have too much. You have too much coverage if you think you may have difficulty meeting the cost later on, or if your income is not stable now. Remember that having some coverage is better than none. You can always buy more if your income increases.

Child Riders

Expect the cost of a funeral and burial to be around $10,000. Having your children covered in the event of an early death will help ease your mind, knowing that such an occurrence will not destroy your finances. If you save the necessary amount of money after getting the rider, you can drop the coverage.

Many families get insurance policies that cover the children. fizkes/Shutterstock

Child riders will vary in cost, and can be added to a policy already in effect or purchased it at the same time as the policy. The benefits and cost of a rider will vary with different companies. State Farm, which is rated the best for families by more than one source, offers benefits of up to $20,000for for children up to 25 years old. The company also guarantees renewable coverage for the child regardless of their health. A company may also terminate child rider coverage when the parent reaches age 65.

Insurance companies vary on how long a child can remain under a child rider. Coverage cannot start until the infant is 15 days old or upon first being discharged from the hospital, the SEC says. Some companies will only cover children up to age 22, and the child may no longer be covered if they get married.

The word “child” permits natural children, stepchildren, and adopted children to be added to the policy. All children listed on the policy are covered for one set price (a flat fee), but they must be added to the policy when it is purchased.

Along with a child rider, you also want to get a waiver of premium rider. This rider will waive all future premiums for you and your children if you become disabled. 

It is important to ask your insurance agent about what happens to child riders when the policyholder dies. Georgia Rose, writing at NerdWallet, mentions that some insurance companies terminate the policy, and all riders, when the primary insured dies.

Buy Life Insurance Early

Tanza Loudenback at BusinessInsider recommends that parents buy life insurance even before any children are born because the younger you are, the less you will pay in monthly premiums. Buying life insurance right away will give you the best rates.

Loudenback also mentions that you may not get the best rate if a woman waits until she is pregnant. Life insurance rates are calculated on presumed health at the time, unless you take a medical exam. If you buy insurance when pregnant, the insurer may permit you to get another medical exam later and recalculate the premiums based on that exam. Taking a medical exam will give you lower rates.

Read carefully before you sign an insurance policy, there might have some items that you don't want to have. Antonio Guillem/Shutterstock

Finding the Best Rate

If you are interested in obtaining the best rate, you may want to use a life insurance broker as they can find the best deals for you. Find an independent broker, rather than one who is paid to direct clients to specific insurance companies.

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