Why do new parents need life insurance?

Life insurance secures the future financial stability of your family if you’re no longer around to provide.

The average cost of raising a child is estimated to be £231,713 over 21 years[1].

Therefore, it’s not surprising that becoming a new parent is one of life’s defining moments when you begin to seriously plan for the future. Regardless of whether you’re a new mum or dad.

Securing life insurance is a fantastic way of ensuring your family is financially secure, whatever the future may hold. Yet, unfortunately, only 50% of parents in the UK have cover[2].

Life insurance for parentsLife insurance for parent


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How much life insurance cover do you need?

Although we believe most people would benefit from life insurance, even if you have no dependants, it definitely takes on a greater significance after you start a family.

What if one of you was no longer around to provide for your loved ones?

Costs to consider to establish how much life cover you need include:

Ideally, your life insurance should cover the value of your home, ensuring your family don’t have to move. It should also cover future living costs, allowing your loved ones to sustain their standard of living.

One other consideration is inflation. What your policy is worth today, may be very different to what it’s worth in the future, in real terms.

To limit the impact of inflation some life insurance policies are linked to indexation, (Retail Price Index – RPI or the Average Earnings Index – AEI).

What type of cover do you need?

There are three main types of life insurance typically used by new parents; decreasing term, level term and the less well-known family income benefit.

Mortgage repayment, outstanding debts and on-going family living costs are some of the key expenses which need to be considered when deciding on cover.

Level term life insurance

Decreasing term life insurance

Family income benefit

Subject to your budget, it’s possible to take out multiple life insurance policies simultaneously.

For example, a decreasing term policy could cover your mortgage, while family income benefit payments are used to cover day-to-day expenses.

How long do you need cover?

Deciding how long you require life insurance cover will largely depend on what it is you’re looking to protect.

For example, you may want to set your decreasing term cover to mirror the length of your mortgage. Ensuring what’s probably your most valuable asset is protected and your family would not have to move home.

Alternatively, you may use the age of your children to determine the length of your policy. This will allow you to ensure you have adequate cover to ensure their financial security until they’re independent.

It’s important to take into consideration the possibility that your child may go to college and/or university. This will obviously push back the age at which they’re self-sufficient.

Having more children

Life insurance policies can be adapted if your personal circumstances change.

Having more children or moving to a larger home are two instances when a special event option can be triggered.

This is when the sum assured can be increased without the need for additional underwriting. This increase will be reflected in the cost of your monthly premiums.

The cost of raising a childThe average cost of raising a child


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Protecting stay-at-home parents

It’s a common misconception that only working parents need life insurance.

If a two-parent family were to suddenly become one, the remaining parent is likely to face many issues. Problems such as having to reduce their working hours to take care of the children, or alternatively to pay childcare fees.

Think about all the unpaid jobs a stay-at-home performs: teacher, taxi, cook, cleaner, doctor, childminder. Then think about the financial and practical implications if they were no longer around.

For this reason, it’s recommended that both parents secure life insurance to cover any additional expenses which may occur as a result of becoming a single parent family.

We wrote a blog post on the true value of a stay-at-home parent (£80k) earlier this year »

Joint life insurance or 2 single policies?

Now we have established the importance of protecting both parents, the question of whether to take out a joint life insurance or two single policies is likely to arise.

Joint life insurance is generally cheaper compared with two single policies, as you only pay one monthly premium instead of two. However, a joint policy will only pay out once, usually on the first death.

In the dreadful event that both parents die together, again only one pay out is issued. If a child loses both parents, a single pay out amount may not provide sufficient cover protection.

After a joint life insurance pay out is made the policy expires. This then leaves the remaining parent either uninsured or needing to obtain a new policy when older.

There are also a number of factors when deciding between a joint or 2 single policies. Visit our joint life insurance blog »

Single parent life insurance

As a single parent, it’s likely that you are your child’s only financial support. For this reason, life insurance is usually essential.

Despite this, only 42% of single parents have life insurance cover[5]. As a single parent, if you were no longer around, your children would be left without both your emotional or financial support.

Arranging single parent life insurance is no different from arranging a standard single policy. Determine what it is you’re looking to protect, how much cover you need and how long you need it for.

You’ll continue to pay premiums for the duration of the policy and if you die during the term, your beneficiaries will receive a pay out.

Critical illness and terminal illness

Statistics show that we’re far more likely to suffer a critical illness during our working lives than to die.

As a result, when arranging life insurance it could be a good idea to add additional critical illness and terminal illness cover.

Critical illness

Terminal illness

You could utilise an early pay out to enjoy quality time with your family, cover the loss of earnings, fund expensive medical care or pay for necessary adaptions to your home.

Write your policy in trust

Writing your life insurance policy in trust means you have more control over the pay out.

At Reassured, we offer a free to use trust service to help you with the application process.

The key benefits of writing your policy into trust are:

Saving money on life insurance

When you have a baby not only does this have an impact on your time, but also on your disposable income. Raising a child in the UK is expensive.

Most of you’ll want to make sure your monthly premiums are as low as possible, whilst still providing sufficient protection.

Tips on how parents could save money on your life insurance premium:

Life insurance for parents in summary:


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Sources:

[1] https://themoneycharity.org.uk/money-statistics/september-2017/

[2] https://www.legalandgeneral.com/life-cover/confused-about-life-cover/articles-and-guides/protection-life-insurance-poll.html

[3] https://themoneycharity.org.uk/money-statistics/51592/

[4] https://www.moneyadviceservice.org.uk/en/articles/childcare-costs

[5] https://www.beaglestreet.com/help/guides/single-parents/