Best life insurance plans for young families

Ironically, says Feldman, young families who need life insurance the most are usually least able to afford it. For them, the best product is often term life insurance.

There are several things to consider when deciding how much term life to buy: 

  • Figure out what you can afford and what your budget allows 
  • Consider the cost of raising a child 
  • Calculate your needs using a life insurance calculator 

Ideally, you'd purchase enough insurance to cover each wage earner's salary in case of death. For example, if you and your spouse each earn about $50,000 a year, you should consider purchasing a $1.25 million policy for each parent--$2.5 million in all. If you both were to die, your insurance policies would pay your heirs $2.5 million.

Although that may sound like a huge amount of money, that's what it takes to completely make up for both salaries. By calculating the numbers, you'll see that investing at a return of 4 percent a year, you'll need a $1.25 million nest egg to replace each $50,000 salary. 

Rates for that kind of life insurance policy vary, depending on your age, gender and health. But, roughly, premiums run $40 to $100 a month to replace a $50,000 salary for a healthy 25-year-old, says Wayne Blanchard, a fee-only certified financial planner in Florida who's affiliated with the Garrett Planning Network. 

That premium amount should be doubled for a two-parent family. "It's not a lot of money to provide that sleep at night factor," Blanchard says.

If you can't afford to pay that out of your monthly budget, buy what you can and add coverage as you're able to. Blanchard suggests a 20-or 30-year level term policy. Feldman, though, says that you should investigate buying permanent insurance--because the total cost over your lifetime could be lower--if you're considering a term policy that is longer than 20 years.

How to choose the right type of life insurance

There are two main kinds of life insurance - term and permanent. You buy term life insurance to cover a temporary need; however, just because a need is temporary does not mean it’s short-term. For example, you may need life insurance to ensure your children have the means to pay for a college education. In such a case, you'd buy a term policy that would expire soon after your children graduated from college. 

On the other hand, whole life or universal life insurance policies, two types of permanent life insurance, are meant to provide coverage for your entire life. You keep up the payments and your heirs receive the death benefit payment no matter when you die.

For most people, term life insurance is the best choice, providing a large death benefit or a reasonable cost during the time you need it most.