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.
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.
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:
- Monthly mortgage repayments or rent. (£121,687 estimated average mortgage debt)
- On-going living expenses. (Food, drink, clothing, car, fuel, school/university fees, leisure activities)
- Household bills. (Gas, electricity, water, council tax, home maintenance)
- If your partner had to return to work, who would look after the children?
- If your partner had to hire childcare, could they afford the fees? (Average cost of full-time childcare £223.36)
- Could they afford to absorb your personal debt? (Credit cards, car finance, personal loans).
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
- Pay out amount and term length is specified on application
- If you die at any point during the term your loved ones receive a fixed lump sum
- Joint cover could protect you and your partner, (but will only pay out once)
- More expensive than decreasing term
- Typically used to cover an interest-only mortgage, future living costs or provide an inheritance.
Decreasing term life insurance
- Pay out amount and term length is specified on the application
- Unlike level term life insurance, the pay out amount decreases over time
- Joint cover could protect you and your partner, (but will only pay out once)
- Generally considered the most cost-effective policy option
- Typically used to cover a repayment mortgage, (as the debt decreases so does the pay out amount).
Read our blog post on the key differences between these two term-based policies; level term vs decreasing term »
- A monthly income amount (not a lump sum) and term length is specified on the application
- The monthly income is paid tax-free
- Easier to budget as don’t have to manage/invest a large sum
- If you die during the term your loved ones receive this amount each month until the policy expires
- Very affordable, low premiums
- This type of insurance ensures your family can afford the ongoing living expenses.
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.
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 this blog post on the true value of a stay-at-home parent (£80k) »
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 a number of factors to consider 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. 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.
- Pays out early if you’re diagnosed with an illness covered by your policy
- Common conditions covered are cancer, heart attack, stroke and multiple sclerosis
- Can be taken out as part of a life insurance policy or as a standalone policy
- If part of your life insurance the total payout of the policy will not exceed the sum assured
- If you make a full recovery you’ll not have to repay the money.
- Pays out if you’re diagnosed with an illness and expected to die within 12 months
- Often included as standard on a life insurance policy
- You can only claim once, (not on diagnosis and when you die)
- If you live past 12 months you’ll not have to repay the money.
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:
- Avoid or minimise 40% inheritance tax (over the £325,000 threshold)
- Avoid the lengthy probate process (for a quicker pay out)
- Have more control over who gets the funds and when.
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:
- Take out life insurance when you’re young, (ideally 20s or early 30s)
- Make sure your policy term is not unnecessarily long
- Live a healthier lifestyle, (lose weight, stop smoking, exercise regularly)
- Don’t overprotect yourself/take out more cover than you need
- Compare multiple quotes yourself or use a broker, as quotes can vary.
Life insurance for parents in summary:
- Consider how long you require cover, (i.e. until the mortgage is paid off and/or until children have left home)
- Don’t over-protect yourself and pay unnecessarily high premiums
- Don’t under-protect yourself and leave your loved ones exposed
- Stay-at-home parents also benefit from life insurance
- Joint life insurance cover is cheaper, (but only pays out once)
- Critical and terminal illness cover options available
- To maximise the pay out you can write your policy in trust.