How the birth of a child affects life insurance

Becoming a parent is a life-transforming experience. This stage of life comes with a whole new set of responsibilities. Apart from caring for and raising a decent human being, you have to support your child financially up to their entrance into adulthood – and sometimes even longer.

It might be a tough situation to think about, but the reality is you will not always be there to provide for your children. That’s why planning for eventualities is critical for new parents.

Life insurance can help keep your partner and children covered when you’re no longer around. Let’s dig deeper into how the birth of a child affects life insurance.

Does having a child affect an existing life insurance policy?

If you already have a life insurance policy, it isn’t affected by the birth of your child. The policy remains as is, the cost of your premiums does not change, and the pay-out amount remains the same.

In fact, if you want your policy to remain completely unchanged, you don’t need to notify the insurance company or make any alterations.

However, it is highly advisable to make some changes to your coverage (like changing your beneficiary – more below). Beyond changes to your current policy, you may need to secure new coverage to increase your death benefit and lengthen the coverage term.

Many parents with newborns opt to increase or augment their coverage to ensure it remains in place until their child is in their twenties, providing continued financial support until they reach adulthood.

Increasing your coverage comes with higher premiums, which in turn creates the need to shop and compare different providers. Securing as many life insurance quotes as possible and comparing policies can help you save money when changing your coverage to cover a newborn.

Should I list my child as a beneficiary on my life insurance policy?

When your new baby comes, it’s important to have them listed as a beneficiary on your insurance policy. Even if your spouse or parent is already a beneficiary, you may also want to add your newborn to the same policy.

Adding your child to your life insurance policy is a simple process. Simply talk to your insurance provider or advisor, they’ll give you the change of beneficiary form to complete, and you’ll be all set.

It’s important to have your children listed as beneficiaries on your policy for many reasons.

• Listing your child as a secondary beneficiary helps to avoid any delays in the payout of your life insurance death benefit in the event of your passing, or in circumstances where both you and a partner pass at the same time. If your policy doesn’t have a beneficiary, it will fall under your estate, which is subject to a lengthy probate process before funds are distributed.
• Additionally, if both you and your spouse pass away unexpectedly, your children may not receive any financial protection until the probate period is over.
• Also, if you have any outstanding debt at the time of your death, creditors can lay a claim on the estate, including the insurance policy payout if it falls into probate.

Marking your child as the beneficiary on your life insurance policy ensures they (or their trustee) get immediate access to the life insurance death benefit.

Which life insurance policy is best for new parents?

There is no one size fits all answer to life insurance coverage. The policy that’s perfect for you will depend on your circumstances.

Whole life insurance

Whole life insurance covers you for life. Regardless of when you die, your policy will pay the death benefit to your beneficiaries as long as you paid the appropriate premiums. However, whole life coverage is typically more expensive than term insurance.

Term life insurance

With term life insurance, you purchase coverage for a specific period, generally 10, 20, or 30 years. When that term ends, you are still covered; however, your policy renews at a more expensive rate.

Because it has a finite term (and thus a lower risk for the insurance provider to give you coverage), term life insurance is less expensive than other coverage types.

Term life insurance is usually more appealing for young parents. It allows you to cover all your other immediate obligations while still providing adequate protection for your family in the event of an untimely death. It’s also a good augmentation coverage; if you already have existing term life or whole life coverage, you can add a smaller term life insurance policy to solely cover the needs of your newborn child.

Most insurers allow you to convert your term policy into whole life coverage at the end of the term.

Will my children receive a life insurance benefit if they are still minors?

Understandably you may be worried about your children’s financial situation if you pass before they reach adulthood.

In Canada, children below the age of 18 are not legally allowed to take full control of a life insurance policy payout. To ensure your children are fully covered, consider forming a trust. The trust will be responsible for administering and distributing the funds to your children until they reach the legal age where they can control their own financial affairs.

Read more about how to create a trust in Canada. 

Insuring your newborn baby

Providing the best for your children is often the goal of every parent. Establishing life insurance coverage for your newborn baby is another important coverage consideration.

• Premiums for children’s life insurance are usually less expensive at such a young age. What’s more, the policy covers your child for the rest of their life and gives them options to secure additional coverage as they grow older.
• Children’s life insurance provides a safety net to cover funeral and other expenses if your child passes before you. While this may be an unsettling thought, it’s always a good idea to prepare for anything.
• Lastly, life insurance coverage for children isn’t only about preparing for the worst. The cash value of a children’s life insurance policy can help your child start their adult life on a good note. It acts as a savings tool that your children can tap into for their education, first house, first car, or keep to establish their own retirement savings.

The steps to ensuring your child is protected are simple but no less important. Read more about choosing beneficiaries for your policy and getting life insurance cover for children, and get in touch with an advisor to help solidify your coverage profile with your new addition in mind.