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Millennial parents are making this 6-figure mistake

CNBC logo CNBC 4/20/2017 Darla Mercado
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For millennials having children, here's another worry they can add to the list: They are underinsured.

A recent survey from Haven Life Insurance Agency showed that seven out of 10 of these parents have less than $250,000 in life insurance.

In March, the firm took an online poll of 500 adults with children ages 5 years and under.

By contrast, these millennial parents report spending approximately $10,000 a year on child care expenses — which accounts for about 12 percent of income, according to the study.

They're also devoting more than 30 percent of their income to housing costs.

"There's a lack of education about life insurance," said Yaron Ben-Zvi, co-founder and CEO of Haven Life.

"People often assume they have adequate coverage through their employer, but it's inadequate in terms of the amount and you can't take it with you if you leave the job," he said.

Here's how to figure out whether you have enough to insure your young family.

Income protection

"The most common mistake I see is when people assume that the policy at work is sufficient," said Matt Cosgriff, a certified financial planner at BerganKDV in Minneapolis. "They're often two times your income."

That's far less than what's needed: Generally it should be an amount that's equal to 10 times your income, he said.

Exactly how much coverage you require will depend on whether you and your spouse work, whether your income is fixed or variable, and how much you and your spouse earn.

"Factor in your income, paying off your debts, monthly living expenses and big-picture goals," Cosgriff said.

You should also account for debts, including your mortgage and student loans.

Last year 42.4 million Americans owed $1.3 trillion in federal student loans. The good thing about these debts is that they can be discharged at death.

This isn't necessarily the case for private student loans or loans on which you have a cosigner. In this case, creditors can chase your survivors for the balance due.

"Your estate will still owe on private student loans, so when you look at how much life insurance you need, consider your private student loans," said Rianka R. Dorsainvil, a certified financial planner and founder of Your Greatest Contribution in Capitol Heights, Maryland.

Children in the picture

Insurable needs go up once children are in the picture. Consider how much it costs to place an infant and a 4-year-old in day care.

As you figure out how much coverage you need, you may also want to project the cost of a four-year college education.

"Often people want to make sure that if they were to die that they have enough money for the kids to go to school and that at least some of it is paid for," said Ben-Zvi of Haven Life.

Comparing policies

When it comes to replacing income, financial planners favor term life coverage — that is, insurance that's in place for 20 or 30 years. That time period is just long enough to raise a child into adulthood or to pay off your mortgage.

A healthy 35-year-old woman can secure $500,000 of coverage for 20 years for less than $20 a month.

So-called permanent life insurance, which tends to be more costly, may be better suited for advanced planning strategies, such as estate or business succession planning.

As you compare term policies, you'll want to consider the insurance company's financial ratings — a measure of its financial strength — and the monthly premiums.

"Term insurance is somewhat a commodity and very much undifferentiated, so the price is the primary focal point," Cosgriff said.

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