There’s a lot of debate in the life insurance universe between whole and term, and which is the best type of policy to have. Whole life offers permanent life insurance coverage, plus an investment provision, but it’s way more expensive than term. Term offers the most coverage for the least amount of money, but there is no cash build-up, and it will expire at some point in the future. It sometimes comes down to personal preference more than anything else.
But one group of people for whom the debate is more obvious is new parents. Term is the best type of life insurance for new parents, and the argument isn’t even close.
Consider the following factors:
You Need MAXIMUM Insurance Coverage
Contrary to popular belief, the need for life insurance coverage actually rises and falls throughout a person’s life. For example, once you reach retirement you may have sufficient assets that you don’t need much life insurance, and maybe won’t even need any at all. With a large enough asset base, you’re virtually self-insured.
But new parents are at the opposite end of that spectrum. Since you’re welcoming a new life into the world, your need for life insurance is probably greater than it will be at any other time in your life.
If you or your spouse were to die early in your child’s life, a substantial amount of life insurance would be required in order to provide for your child’s living expenses, as well as for a college education as he or she gets older.
Though you may have only needed $100,000 in life insurance when you were single, you may need $500,000 or $1,000,000 as a parent. That’s virtually the kind of money that raising a child requires today, especially if you have more than one child.
For most new parents, the only workable way to afford that amount of life insurance will be through a term policy.
Your Budget Is Tight and Life Insurance Isn’t an Immediate Need
It’s virtually a cruel irony that the time in your life when you need the greatest amount of life insurance is also likely to be the time when you have the least ability to afford it.
Make no mistake about it, maintaining a large life insurance policy using whole life insurance will be prohibitively expensive. And it will come at a time when you will be paying for medical expenses related to childbirth and the care of an infant, possibly for childcare, and for acquiring all of the goods and services that’ll be necessary as your baby grows into a toddler, and so on.
In that environment, life insurance simply isn’t an immediate need. There are all kinds of financial obligations that need to be met, so you will need to keep the cost of your life insurance to an absolute minimum.
The only way to do that is through a term life insurance policy.
There Are Far Better Ways to Invest Your Money Than In a Whole Life Policy
Much is made by insurance agents and brokers about the cash and investment value of whole life insurance policies, as well as more exotic insurance plans. After all, they reason, you need to be building up your investment base at the same time you’re providing adequate life insurance coverage for your family.
This may be true, but insurance policies are a poor way to create an investment base, and not at all a cost-effective way to get the level of life insurance coverage that you need.
No matter what you may have heard about the investment provisions of whole life, you can do much better on the investment side by detaching it from your insurance. What brokers often don’t tell you is that life insurance related investments come with a lot of ugly fees, that will substantially reduce the value of your investment.
The saying is buy term, and invest the difference. And that’s exactly what you should do. Buy the largest term life insurance policy you can afford, then invest money in a no-load index mutual fund or exchange traded fund, and you will outperform any investment provisions that will be contained in a life insurance policy.
Your Need For High Coverage Is Actually Temporary
For most people, the idea that you need permanent life insurance coverage is mostly a myth. Yes, you will need some level of life insurance throughout your life, but you probably won’t need as much as you do when you’re a new parent.
Term works especially well in this regard. If you take a 20 year term policy for $500,000 when your child is born, you’ll probably be able to cut down the amount of insurance that you need at the end of that term. After all, when your child is an adult and in college, the need for coverage will decline. You may find that you only need a policy for $100,000 or $200,000 at that point.
The opposite is likely to happen with whole life insurance. Because it is so expensive, you may even have to increase your coverage at a later date. That will mean buying more insurance, and that will make your coverage even more expensive.
You Have Other Financial Priorities
The financial priorities that you have as a new parent are greater than at any other time of your life. Not only do you have other expenses, but you also have other provisions that need to be made. One of them is saving for your children’s college educations. Another is making sure that you always have a well-stocked emergency fund – just in case. And at the same time, you also need to be providing for your own retirement.
That’s a lot of financial priorities to be juggling at once, and the only way to do it will be to keep your expenses to an absolute minimum. Term life insurance will accomplish this in regard to your life insurance needs.
