Life insurance for new parents

Why this is the event that changes the answer

A child is the longest financial commitment most households take on. A mortgage might have 22 years to run; a newborn has around two decades before they are standing on their own.

That is why having a child is the most common trigger for buying coverage, and why the amounts involved are usually larger than people first estimate.

The calculation, specifically for parents

The general method is in how much coverage to consider. Two elements change for parents.

The time horizon is set by the youngest child. Count the years until they finish education and support themselves. For a newborn that is roughly 20 to 22 years. This usually runs longer than the mortgage, and it is what should drive the term length rather than the amortisation schedule. See choosing a term length.

Childcare is a real line item. If one parent died, the surviving parent would either pay for care that was previously provided at home, or reduce their working hours. Both cost money, and the cost runs for years.

Education funding is a choice rather than a necessity, and if it matters to you it belongs in the number.

Both parents, including one who is not earning

The instinct is to insure the higher earner, or only the earner. Both are usually wrong.

Two earners. Both incomes are being spent. Losing either one creates a shortfall, and the mortgage sits on both of them. Both need covering, though not necessarily in equal amounts.

One earner and one at home. The earner obviously needs coverage. The parent at home does too, and this is where households most often under-insure.

The reasoning is simple arithmetic rather than sentiment. If the parent at home died, the surviving parent would need childcare, after-school care, and help with the household work that was being done for free. Someone has to pay for that, or the surviving parent works less. Either way the household is materially worse off, and the effect lasts until the children are older.

The amount needed is usually smaller than for the earning parent and it is rarely zero.

Do not name a young child as beneficiary

This is the mistake most specific to new parents, and it is entirely avoidable.

Naming a minor directly as beneficiary means the money cannot simply be paid to them. Depending on the province, it may end up administered by a public trustee or require a court process, with the child receiving the full amount at the age of majority whether or not that is sensible.

The usual alternatives are naming the other parent as primary beneficiary with a properly structured arrangement behind it, or naming a trustee for the child in the designation, or dealing with it through your will. Which is appropriate depends on your province and your circumstances, and it is worth getting right. See naming a child under 18.

While you are at it, this is the moment to have a will and to name a guardian. Insurance without a will leaves the important decisions unmade.

Timing

Applying while expecting is generally easier than applying with a newborn in the house. Underwriting takes weeks, requires appointments and paperwork, and neither is easy in the first months after a birth.

One practical note: some insurers will assess a pregnancy differently at different stages, and complications during pregnancy can lead to a postponement until after delivery. If you are applying during a pregnancy, mention it and ask how that insurer handles it.

Work coverage is a starting point, not the plan

Many new parents discover their employer provides some coverage and conclude they are covered.

Group coverage is typically one or two times salary, which against 20 years of childcare and a mortgage is a fraction of what is needed. It also ends when the job does. It counts toward the total, and it should not be the total. See work coverage versus your own policy.

Revisit it

The number that made sense with one child is not the number that makes sense with three, or after a move to a larger mortgage.

The usual pattern that works is a large term policy sized to the current picture, then adding a second policy later if obligations grow, rather than replacing the first. Adding is generally simpler and avoids the risks of replacing a policy. See using more than one term policy.