This is the second installment in our Life Insurance for Moms series. If you haven’t read the first, please click the link below to view it:
Becoming a new parent isn’t just a day, or event: it’s a complete change in lifestyle, a change in direction for your life, and a change in mindset and priority which will last forever.
If you’re like most parents, you ask for advice from any and everyone, you scour the internet for every mommy blog, find a new parent forum to be a part of, or subscribe to parenting newsletters. You might even buy a baby book to read daily as the big day approaches.
Then, after months and months of waiting, the day arrives.
Life Insurance For New Parents
While this might be the one of the most emotional days of your life, so will the day you lose your spouse. While life has a beginning, it’s also got an end, and it’s not always as you planned it. Unfortunately, not everyone gets to grow old and into their 90’s or even 100’s.
With the new addition to your family, it might be time to consider life insurance for new parents if you don’t already have your coverage in place. If you do, congratulations, you’re a step closer to a peaceful nights sleep, although I wouldn’t look to the near future for one of those!
If you’re like many million other parents, you have yet to buy life insurance to protect your child’s future; and remember, it is for your child as much as your spouse. While it provides your surviving spouse with funds to pay for essentials, it can also provide your child with a continued lifestyle which he’s accustomed to growing up in, or it might give him the opportunity to go to college where he might not have been able to otherwise if you weren’t still around. If you are pregnant now and want to know if you can get life insurance while pregnant, we can answer this question and help you in obtaining the coverage you deserve.
Life insurance for new parents is a crucial way to protect what you have now so it won’t be lost if you are. Don’t think about it as being worth dead than alive. Anyone who uses a phrase like this is uneducated. The reason you even need life insurance is because you are extremely valuable alive: the insurance only attempts to replace what you would have created financially.
While it’s a morbid subject, you and your partner need to stop and think about what value you hold as new parents. Life insurance is purchased to replace the value you have now, and your future value as a parent as well.
We’re talking about human capital.
But what exactly do you do to find out what you’re worth?
The Value Of A New Parent
Knowing what you’re worth, from a financial standpoint, as a parent is vital to assess the amount of life insurance you will need. The value you provide to your home comes from different sources, and it’s not always easy to come to an exact figure. Some items to consider are:
- Role in Household
- Number of Children
The easiest factor in determining your human capital going forward is to look at your income. If you are on salary, its simply taking your salary times the number of years you expect to continue making the same income to get a lump sum amount. Usually, for younger families, it’s up to 15 or even 20 years. If you are older and have less of a time frame to continue working, it might be less than 10. If you are completely unsure, round it to an even 10 years.
As an example, if a husband makes $50,000 and a wife makes only $25,000 because she works only part-time, the husband would need around $500,000 in coverage and the wife would require $250,000.
Role in Household
The role you play in your household is going to make an impact on what your life insurance coverage amount should be. If you are the primary breadwinner, your coverage amount is going to be largely contingent on the amount you make per year.
If you are a homemaker, though, it is going to be a little harder to measure your value in dollars. As new parents, the value a homemaker has on the household is often overlooked, yet is a tremendous responsibility. Studies have shown in order to replace a stay at home mother, for example, who has at least one child it could cost over $25,000 per year.
Your current assets are the next item you’ll want to consider before you make a final decision on how much life insurance as new parents you’ll apply for. Anything which has immediate market value is something you should consider.
Things like 401(k) account values, cash, savings and checking accounts, CD’s and other cash equivalents are all things you need to take into consideration. If you already have $100,000 in your 401(k) for example, and your spouse is the beneficiary to the account, you’ll need $100,000 less in death benefit (this would actually not be exact, due to taxes and fees, but just for ease of calculation).
If you have extra liabilities which you would be leaving behind, you’d want to consider paying them down or completely paying them off should something happen to you. Personal loans, private student loans, and credit card balances are all good examples.
This is a little bit more of a grey area because some would argue your replacement income would pay those things down over time. But if you could pay them off immediately after you passed, your family would save an extraordinary amount of interest over time. Someone might also argue you could invest the money and keep the difference, but when it comes to your family’s future, life insurance proceeds are nothing to risk in the market.
The younger you are, the greater your human capital. The older you are, the lower it is as your working years diminish. Hopefully, as you work longer, your income rises, but there is also inflation to discount it, too.
If someone is 25 years old, they may have as much as 40 years remaining to work, but if someone is 50, they only have 15 years left. If you’re younger, you likely have your children still living with you, and bear the responsibility to them, but as you age, your children (hopefully) will move out and will become self-sufficient.
Number of Children
The number of children you have is a big factor for a couple reasons. The cost of basic necessities per child is obviously the largest thing to consider. College costs are the next.
You may also want to simply leave a legacy to your children, not tied to any one responsibility or liability. This is not uncommon. Just be sure to set some guidelines should your children still be minors upon receiving any proceeds.
Continue to follow along this month as we discuss in detail where life insurance might be appropriate for parents who are single or divorced.