Life insurance tips for new parents

When should you buy life insurance? Banks normally encourage customers to sign up for life cover when they take out a mortgage. But if you are buying a property on your own, or with a partner who would be able to support themselves (and cover mortgage repayments) if you were to die, it may not be absolutely vital.

Starting a family, however, is another matter: when you have children, the financial consequences of one parent dying are likely to be much more severe. That is why setting up a life insurance policy should be near the top of prospective or new parents' to-do lists.

Why life cover is important for families
A life insurance policy would be able to pay out a lump sum or a regular income to the surviving spouse if a family's main breadwinner were to die. In many cases, for example, this could make the difference between being able to stay in the family home, and having to sell up and move to cheaper accommodation.

Should both parents be covered?
It might seem sensible just to cover whichever parent is providing the main source of income for your family - for example, if one of you is working while the other stays at home to look after your children.

But think about the financial implications of the carer's death. In a lot of cases this would force the breadwinner to give up work, at least to some extent, to look after the children: another reason why a life insurance payout would be necessary.

What types of cover are available?
Once you've decided to buy life cover, what type is the most suitable?

Term insurance is the simplest and least expensive. This will cover you for a fixed amount of time, which means if you don't die within the term, you get nothing back.
You can opt for the potential payouts to fall as time passes, to reflect the fact that you will gradually be paying off your mortgage.

Level-term insurance promises to pay out the same amount no matter when the policyholder dies (provided it is within the term), but premiums will be higher as a result.

Whole-of-life policies are investment based and more complicated. The cover they provide may be longer-lasting than term insurance, but this comes at a price.

You may decide to buy a policy that also offers insurance against a critical illness, such as cancer or heart disease, which meant you were unable to work - but this would increase the size of your premiums considerably.

Or you could choose a policy designed simply to pay off your mortgage if you or your partner died.

How much cover should you buy?
The main factors which will determine the cost of your policy are the extent of your cover, and how long the policy runs for.

The amount you're covered for should be based on the size of your mortgage and your family's living expenses. If you've only recently taken out a mortgage and have yet to pay much of it off, this may be quite a large sum. But even if you can't afford to cover the whole amount, some life insurance is better than none.

The other decision is how long you should be covered for. If you've just had your first child, a term of 25 years would probably cover younger siblings as well until they reached university age. Parents of older children, who also have less time to run on their mortgages, could reduce the term accordingly.

Other factors
There are a few other things that affect the price of cover: your age, gender (women typically live longer than men), and whether or not you smoke are three of the most significant.

Bear in mind also that your employer may already offer some form of life insurance, for example "death in service" benefit: there is no point in doubling up on cover.

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Author (David Martin). Submitted on Tue, 27 Jul 2010 Time: 5:11 PM

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