Congratulations! You're a new parent. If my experience is any indicator, this will be a life-changing, sleepless experience for you; but it is so fulfilling.
So many things in your life change when you become a parent for the first time:
Your social life, your priorities, goals, maybe your values, personal time (did I mention sleep?) And relationships, to name a few.
Planning for the new life and being prepared and protected helps to facilitate these transition times.
Although your goals and values may change, one of the things that does not change is the need for financial planning, and one of the building blocks of any financial plan is life insurance.
Life insurance for new parents is important
If you are a young family and already have a financial plan, tell them you are proactive, but it's time to update things so your family grows.
In mention financial planning because property planning is a core tenant in financial planning while insurance is a fundamental part of property planning.
What happens to your life insurance if you are a new parent?
At the most basic level, there are three options:
Digging a little more into these is the possibility that you have more than enough coverage when you become a new parent quite unlikely.
With your first child comes increased expenses, more people to take care of and generally a greater need for life insurance than before.
The second possibility that your coverage is suitable is also unlikely but is really possible. This can happen if you were overinsured before you had a child.
If this is the case for you, this would be an example of excellent planning and be very proactive or random luck. However, I would still encourage you to do an analysis when your new roommate arrives.
The last possibility that you need more insurance is the most common situation.
It's hard to understand how much things change with a new baby and hard to know exactly how you will know about insurance needs when this happens
It would be best to Re-evaluate your goals, values and insurance needs when you become a new parent.
You can do this before or after the baby arrives. Personally, my thought process changed after the baby arrived and my priorities became clearer.
It became a more personal activity rather than an exercise in hypothetical. When my daughter was born, she melted my heart and my life changed.
I think this is a fairly common situation, so make sure you review and re-evaluate when your baby is born. 19659002] There are many ways to determine your life insurance needs as a new parent.
Let's look at two ways to calculate your insurance needs: goals based in a financial plan and income based calculation.
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Goal-Based Life Insurance Calculations
When you have a new addition to your family, your goals can change in many ways. First, what plans do you (and your partner) have for the baby?
Do you want to pay for college for them? How does your partner feel about it? Many couples I work with have different opinions, and this is important to discuss early.
If one person wants to pay for 100% of college education and the other does not want to pay for anything, it's something you need to work through.
Do you want to pay for celebrations throughout your life? Some examples to consider are a Bar Mitzvah, wedding, high school or college degree or a quinceañera, to name a few.
Assume that one of these events has a high priority for you and an important goal. In that case, it is important to note and include them in the calculation of the insurance need.
Other goals may change that do not directly affect your child. Think about your retirement date.
Maybe you had planned to retire at age 40 but are now planning to work later.
Many families plan to continue working until their children have completed high school or college.
Another thing to keep in mind is vacation planning. When you are single or a childless couple, you may travel the world with relatively little care.
With children, more planning is required and destinations are likely to change. Backpacking Europe in the 20s is fantastic, but you probably do not want to stay in a hostel with a baby.
Maybe holidays become more expensive, delayed a few years or go to two different destinations.
A third consideration is moving. I live in the Midwest, and it is a common goal to buy or rent a place where it is warmer in the winter or move to something warmer in retirement.
This is another goal that I often see families agreeing with graduation or one that depends on where their children will live during college.
You should also consider things like what would happen in your household if you die.
Maybe your partner stopped working when the baby was born to take care of them until they start school.
Will they go back to work if you die? Can they quickly get a new job? How much will childcare cost in that scenario?
It is not the nicest conversation to consider, but it is informative for this discussion.
How much life insurance does a new parent need?
Knowing and quantifying your goals is a way to calculate your life insurance needs.
If you have clear and specific goals for your new baby, you can assign values to goals.
When done, you can add them and quantify the amount of insurance you need to ensure that your family's future is protected in the event of something happening to you.
There are many costs associated with being a new parent; some are more obvious, others not. There are household expenses such as daycare, diapers, formula, small shoes, cute baby clothes, accessories and toys related to having a baby.
Other costs may come with age, such as private school, tutor, sports and activities, college or car, to name a few examples.
Let's look at an example:
Let's say that you ultimately want insurance that pays for all college expenses and a wedding for your child, additional child care that your spouse would need, and compensation for you self.
Let's make numbers here. For a baby born today, the expected cost of attending college in 18 years is about $ 220,000 for an average state university.
Wedding costs can vary widely, depending on many things really, but let's say $ 100,000 for a nice party. Childcare varies depending on the area.
Where I come from is childcare about $ 2,000 a month per child or $ 24,000 a year – so we can say $ 100,000 for four years.
I will dig into the income swap calculations below, but let's assume you would need $ 1,500,000 to replace your income.
Add these, and you would need $ 1,920,000 life insurance. You can not really buy insurance for $ 1,920,000, so you need $ 2,000,000 in insurance. Seems like a lot? I do not think so for this situation.
This is just one way to use financial planning to calculate life insurance needs. The better you are at setting specific goals, the better your insurance calculation will be.
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Coverage based on current income
Another way to estimate what an appropriate amount of life insurance for new parents may be is to base the amount on your current income (adjusted for inflation).
The advantage here is that you do not specify the goals. You're just saying if something terrible were to happen, there would be an income for your surviving beneficiaries to support themselves.
This approach can give a sense of flexibility and give you the ability not to consider all possible difficult circumstances. It can only be a more manageable approach for you.
To use this approach first, you must determine if the insurance amount is intended to be spent or if it is intended to provide income and maintain or grow the value.
If it is to be spent down, you determine the need for income and multiply it by the time you need it to keep. I recommend that you use an ideal net income level for this calculation.
For example, let's say you want $ 5,000 a month in net income; That's $ 60,000 a year. Let's assume you want that income for 30 years.
Maybe 30 years will correspond to the pension or social insurance start date. The date child will be made with college or another important date.
Multiply just $ 60,000 by 30, and voila, you would need $ 1,800,000 in insurance.
Alternatively, you can decide that you want the benefit to be income. You can invest the assets based on your risk tolerance and risk capacity and spend the income.
How you choose to invest is up to you, but the critical part here is what income or growth assumption you will use.
If you decided that an annuity was best for you, you can get a guaranteed interest rate or assumed interest rate, and you can use it for your income.
If you invest in stocks and interest-bearing assets, you must assume a growth or withdrawal. The most common prices used in the industry for this are four or five percent.
You must also decide what level of your income you want the insurance benefit to provide.
Let's use the same number from the last example
Suppose you were to calculate this in depth. In that case, it is more complicated because you have to take into account the desired net income and then increase for taxes based on this income and other sources of income.
Still, I will ignore this because it's way too deep for this blog.
What you do is take the income requirement and divide it by the payout percentage, or $ 60,000 divided by 4% (0.04), which becomes $ 1,500,000.
The beauty of the income method is that you do not necessarily have to limit your insurance to your goals.
Defining an income that you know will be enough to support your family's lifestyle gives your survivors the flexibility to use the assets at the time needed.
It may also be easier for what your income will look like over the next 30 years and try to replace it, rather than choosing what your child might want when they are teenagers.
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