Dear Penny: What’s the Best Way for New Parents to Buy Life Insurance?

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Dear Penny,

My wife and I recently had a baby, and now we want to do the responsible thing and get life insurance. We're both professional ladies in our mid-30s, and we are hoping to buy a house in the next three years. 

Assuming our mortgage will be for 30 years, it seems reasonable to buy life insurance for a 30-year term, ensuring neither of us is left with years of mortgage payments she'll struggle to meet on one income, if the worst happens. 

However, most life insurance offers seem to be for 20 years, and doing a longer term makes the monthly payment steeper (and they are already not cheap, due to some health issues). An agent we spoke to about our wish for coverage to fit mortgage timelines said the thing to do is layer several policies on top of each other — buying a 20-year policy now, and adding another 20-year policy in 10 to 15 years. 

I'm not sure that's good advice. My thinking is that in 10 years we'll be older, and may have new health issues, pushing up the prices of any new policies we add. However, I wonder, could 10 or 15 years of higher monthly payments now end up being more money than what we'd pay for a higher priced policy later? 

-Baffled New Mom

Dear Baffled,

Morbid thought for the day: Every year, your life gets more expensive to insure because every year, you get closer to death. Life insurance premiums reflect this reality.

So I think your instinct is spot-on here: With life insurance, the rule of thumb is to lock in premiums while you’re young. 

That said, buying multiple term life insurance policies could save you and your wife money — but not in the way you lay out.

Your life insurance needs change over time. You need more of it when you have dependent children, but less of it when the kids are done with college. By the time your mortgage is paid off and you’re nearing retirement age, you might not need it at all.

One option would be for you and your wife to each get quotes for two policies (four total): one 20-year policy to get the surviving spouse through the years that you’ll still be providing for your child and a second 30-year policy that would cover your half of the mortgage. By limiting the death benefit of the longer policy to your mortgage liability, you could reduce the cost.

The downside is that this strategy, often referred to as a life insurance ladder, works best when life is fairly predictable. If your home purchase is up to three years out, it’s difficult to determine how much life insurance you’d need to cover your share of the mortgage. Also, if you plan to have more children, a 20-year policy probably won’t be enough.

If your life plans have a lot of uncertainty, this may be one of those situations where it’s worth it to sacrifice the extra money to ensure your family is protected in the worst-case scenario.

But you also need to be prepared for a non-worst-case — but likelier — scenario: What if you or your wife became disabled? 

The cost of a disability can be especially devastating to a family. The loss of income is usually accompanied by higher medical costs.

Assuming you don’t have an unlimited budget to throw toward insurance, it’s essential that you take a big-picture look at the scenarios you could face when you decide how to protect your family. That could mean that you purchase less life insurance coverage so you can afford a good disability policy, as well.

Sure, it’s great if you can afford a policy that’s large enough to meet all your family’s financial needs for decades, but most people can’t. You don’t want premiums to be so high that you can’t afford to save for emergencies or your retirement.

I know I’ve just made the topic of insurance even more baffling for an already baffled new mom. Sorry. 

Your life insurance needs don’t exist in a vacuum. On that note, you and your wife would probably benefit from meeting with a financial planner, who can help you prioritize your insurance needs with your other goals. 

They can also help you work through other baffling money challenges you’ll face as new parents — like saving for those soaring college costs.

Robin Hartill is a senior editor at The Penny Hoarder and the voice behind Dear Penny. Send your tricky money questions to [email protected].