Life insurance for new parents

I’ll be honest. I’ve found myself overloaded with finance for the past several months. My job is already in finance, but on top of that, we’ve also been looking into estate planning and education funds like Coverdells and 529s now that we have a son, figuring out what to invest in given recent conditions and even starting our house hunting process (which, in the Bay Area, means you’re still in for sticker shock even though prices have supposedly dropped dramatically).

Still, these are things you have to do once you’re a parent. One thing that became evident through the estate planning process we’ve begun is that we’re woefully underinsured. My husband and I had always just signed up for whatever default life insurance was offered by our employers, but all that’s changed now that we have a child.

So, the last several weeks have seen us looking into term life insurance options. There are actually many types of life insurance policies, but we opted for term since it’s the simplest and inexpensive, and suit our needs.

Here are some things we learned through the process so far:

Why would you need life insurance through an independent provider? This was the first question I asked. It turns out that although many employers offer life insurance and even options to purchase additional coverage, you lose that coverage if you leave your employer for any reason. We ended up purchasing policies through a Prudential agent that came through a personal recommendtion, although there are obviously several different insurance companies out there, and just as you’d do with auto or any other type of insurance, it’s worth shopping around a bit for prices and service.

How much insurance should you get? Life insurance is basically “income replacement”, meaning that if something were to happen to you, you would want your family to (ideally) be able to survive and pay living expenses like mortgage payments, school tuition, food, and other recurring monthly expenses. With term life, you receive a one-time death benefit in a lump sum payment which is not taxable. You would then calculate what kind of a return you might reasonably expect to earn off of that (say, for example, 5%) to determine how much you would receive per year.

For example, if you took out a $1M policy, at 5% a year, you would receive $50K a year, which you can then compare with how much you spend a year on living expenses. However, keep in mind that the $50K could be taxable in the form of interest income or capital gains (depending on how you choose to invest the $1M). A few simple calculations will allow you to back into the amount you would ideally need to cover living expenses. Just make sure to capture all expenses and any additional ones you might see in the future (such as school tuition). To be honest, this exercise is a sobering one as you’ll quickly see how fast expenses start to add up :(

What’s the pricing structure like? The pricing structure varies by the amount of the policy and the length of the term. The longer the term or the higher the amount, the higher the price. There are also several tiers that depend upon your health status. Different insurance companies have different names for these (e.g. “Elite Plus”, “Preferred”, etc.) but as you can guess, the healthier you are, the better the tier you qualify for, and the lower the price. Men generally cost more than women, and your age, cholesterol level, blood pressure, and health history all play a role in determining the premium you pay.

When I called different insurance companies to check, most of them had consistent criteria for qualifying for their best rates, which included diastolic blood pressure readings (the lower number in the blood pressure reading) below 80, and total cholesterol to HDL cholesterol ratio below 5. Of course, there are many other criteria as well that they didn’t mention. Most seemed to focus on items related to heart condition and cholesterol levels though.

What’s involved in the process to get life insurance anyway? First, the agent runs through a series of questions (your age, lifestyle, general health), and provides you with some price quotes for different terms and insurance amounts (but usually only the pricing for the best tier). The next step, at least with Prudential, involves a more in-depth interview with a rep over the phone that lasts 20 min. or more during which the rep will run through a detailed questionnaire of your and your family’s health history. After that, you will likely have to go to a lab (or have a lab tech come to you) to provide blood and urine samples and get your blood pressure readings done, and even an EKG (depending on age), all of which are sent to official labs for testing. Often, medical files from your doctor are also requested. In general, the process takes about 4-5 weeks to complete. Once results come back, your final rate is determined, and then policies are drawn up for you to sign.

Insurance isn’t the most exciting topic, and applying for life insurance definitely made me feel old (probably from seeing too many life insurance commericals on TV), but it’s the responsible thing to do. Oh, the myriad ways life changes when you become a parent… :)

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