Life insurance for parents

Becoming a parent may be the first time you have someone truly dependent on you. It’s a great time to consider life insurance and protect the financial future of your children.

Becoming a new parent brings a whole host of new responsibilities, and buying a life insurance is probably not a priority right now as you settle into life as a new mother or father.

However you may want to reconsider that, and take a few minutes to get life insurance sorted for you and your family.

Buying life insurance is a relatively inexpensive way to protect your new family’s financial future. In a nutshell, should the policyholder die within the policy period, a lump sum will be paid to the beneficiaries to ensure they can remain financially stable in the future.

Why life insurance is important for parents

A life insurance policy pays out a lump sum which can contribute to sustaining your family financially. This lump sum can be the difference between staying in the family home without incurring any additional financial debt, or having to sell up and move into cheaper accommodation to make ends meet.

Sorted.org.nz sums up the importance of life insurance by simply stating: “If there are people who depend on us financially, we need insurance to protect them.”

Should both parents be covered?

If you are in a situation where one partner is the ‘breadwinner’, and the other stays at home to look after your children, it may be tempting to just insure the breadwinner.

Although this thinking is common, keep in mind the financial implications of the stay at home parent’s death. In many cases, such an event will force the breadwinner to give up work, either entirely or onto reduced hours, to look after the children. Alternatively, additional income may be needed to pay for childcare.

Two individual policies will offer your family a greater level of cover, to ensure that should either parent die, the other one will be able to stay afloat financially.

How much cover should you buy?

Deciding how much cover you should buy is one of the main decisions when buying life insurance.

There is no one-size-fits-all answer to this question. The amount of cover you buy should reflect your own personal circumstances, and what stage in your life you are at.

However there are a few basic rules of thumb to take into account when deciding how much life insurance cover you should buy. Think about the following:

1. The size of your mortgage – Your mortgage is likely your largest financial commitment. You need to ask yourself whether your family can continue to pay for your mortgage in the event of your own death. If you have a large mortgage, and are the main breadwinner for your family, you will likely want to consider increasing the level of cover on your life insurance policy relative to the size of the mortgage. If you were to die, this lump sum payment can either partly, or fully, pay off your mortgage.
2. Your family’s living expenses – If your family has a lot of ongoing living expenses you may want to consider how these will be paid if you were to die. This can include standard utility costs, or more specific expenses such as car payments or credit card repayments. A lump sum payment from a life insurance policy can help ease the burden on paying these expenses for a certain amount of time, or in some cases, the insurance payment can eliminate the need for payments altogether (e.g. allowing your family to completely repay a car loan).
3. Child Care – Even if your partner is a stay at home parent, you will most likely also be carrying out unpaid responsibilities looking after your child. Something to consider is, should you die, will your partner incur additional childcare costs? Help around the home that you have previously carried out for free may now need to be replaced by professional services.
4. Schooling & Education – As a new parent, you no doubt want the best for your children’s future. A life insurance policy can help contribute towards your children’s future schooling and education in your absence. This can range from helping with school fees and uniform costs, all the way to substantial contributions towards university tuition costs.