Having a baby or adopting a child changes everything (in case no one has told you, yet). You will have an additional person relying on you to provide everything from new clothes, to food, shelter, and doctor visits. All of which cost money. Life insurance is a way to ensure your family would be financially protected if something happened to you or your partner.

You might assume the life insurance policy provided through your work is enough, but it often isn’t—plus, it only covers you while you’re employed at that company. Parents should have personal life insurance policies that stay with them no matter where (and if) they work.

Here are the life insurance basics that new parents should know before shopping for the perfect policies.

How life insurance works

Life insurance pays out money, called a “death benefit,” to a beneficiary—ideally a spouse or partner—when the insured person dies. There are complications with naming an underaged child as a beneficiary, so be sure to speak with an insurance expert before deciding who to list as a beneficiary on any policy.

The money paid out can cover the costs of a mortgage, child’s college education, and everyday living expenses.

The price of a policy is determined by amount of coverage (the death benefit amount you choose) and the type of policy (see the next section), along with the insured’s age, sex, health, smoking habits, and hobbies. In general, the price goes up with age, ill-health, smoking habit, and risky hobbies (like scuba diving or skydiving).

One of the reasons it’s wise to secure a policy early in parenthood is because on average rates rise 8% each year as you age, and any new health diagnosis can raise rates, too. For women, it can often be cheapest and easiest to apply for a policy before pregnancy—this ensures any medical complications during pregnancy won’t affect policy rates and coverage is in place before birth.

Both parents should have life insurance coverage, even if only one of you plans to work outside the home. Stay-at-home parents are childcare givers, cleaners, tutors, cooks, coaches, etc. If they passed away, you would need to pay multiple people to provide those services and support. A life insurance payout from a stay-at-home parent also gives the other adult the option of spending more time at home, away from work, to grieve and help the family recover.

However, sometimes it will make sense for both parents to share one policy. This might be the case if one of you can’t qualify for an individual policy.

Types of policies

There are two categories of life insurance policies: term and permanent.

Term life insurance is the most affordable, allowing you to buy more coverage (i.e. a higher death benefit) for a low monthly cost. It’s called “term” life insurance because the policy covers a set time period, usually 10 to 30 years. The policy will pay out the benefit if you pass away during that time. Many financial and insurance advisors recommend you choose a term that matches your longest financial obligation—like a 30-year mortgage or until your youngest child is grown.

Permanent life insurance coverage never ends; it will pay out if you passed away in five years or in 47 years. Whole life, universal life, variable universal life, and indexed universal life are all types of permanent life insurance. In addition to a death benefit, permanent life also has an investment component, called “cash value.” This is part of the money you pay each month that is invested and grows, tax deferred (you don’t pay taxes on it until you withdraw it). Once the cash value total hits a certain amount, you can borrow against it, like a loan. Any outstanding loan amount against the cash value is deducted from the death benefit, should you die before repaying the loan.

You might have already guessed it, but permanent life insurance is much more expensive—eight to 10 times more expensive than term. Because the return on investment of permanent life insurance’s cash value is relatively low compared to other investment options, it can be more advantageous to pay for the less expensive term life policy and then invest the difference in other, more profitable options.

Choosing a policy

For most families, term life insurance is sufficient to meet their needs if one or both parents die. And, for the most part, at the end of a term policy, you won’t need the life insurance payout anymore because your children are independent, your mortgage and other debts are paid off, and you’ve built up your savings for retirement. If you’re concerned you might want a permanent policy later, many term policies have the option to convert.

Permanent life insurance is most useful if you have a child with special needs who will be a lifelong financial dependent. Permanent life can also be an estate planning tool to cover federal or state estate taxes.

Most financial advisors say 10 to 12 times your annual salary is a good place to start when deciding how large of a policy to purchase.

With this information, reach out to an independent or fee-only life insurance specialist to find a policy that can protect your family from day one.

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