Congratulations! You’re a new parent. If my experience is any indicator, this is going to be a life-changing, sleepless experience for you; but it’s oh-so fulfilling.

So many things in your life change when you become a parent for the first time:

Your social life, your priorities, goals, perhaps your values, personal time (did I mention sleep?), and relationships, to name a few. 

Planning for the new life and being prepared and protected help make these transitionary times easier.

While your goals and values may change, one of the things that don’t change is the need for financial planning, and one of the building blocks for every financial plan is life insurance. 


Life Insurance For New Parents Is Important

If you’re a young family and already had a financial plan, kudos to you for being proactive, but it’s time to update things to include your growing family.

I mention financial planning because estate planning is a core tenant of financial planning while insurance is a fundamental piece of estate planning. 

What Happens To Your Life Insurance If You Are A New Parent? 

At the most basic level, there are three options: 

  • You already have more than enough coverage or are over-insured,
  • The coverage you have is appropriate, or 

  • You need more life insurance coverage or are underinsured. 

Digging into these a bit more, the possibility you have more than enough coverage when you become a new parent is pretty unlikely.

With your first child comes increased expenses, more people to care for, and generally, a greater need for life insurance than before. 

The second possibility that your coverage is appropriate is also unlikely but is certainly possible. This might happen if you were over-insured before having a child.

If it is the case for you, this would be an example of excellent planning and being very proactive or random luck. However, I would still encourage you to do an analysis once your new roommate arrives. 

The final 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’ll feel about insurance needs once this happens. 

It would be best to reevaluate your goals, values, and insurance needs when you become a new parent.

You can do this before the baby arrives or after. Personally, my thought process changed after the baby arrived, and my priorities became more apparent.

It became a more personal activity rather than an exercise in hypotheticals. When my daughter was born, she melted my heart, and my life changed.

I think it’s a fairly common situation, so make sure you review and reevaluate after your baby is born.

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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Goals 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 that? Many couples I work with have differing opinions, and this is important to discuss early on.

If one person wants to pay for 100% of college tuition and the other doesn’t want to pay for any, that’s something you need to work through.

Do you want to pay for celebrations throughout life? Some examples to consider are a Bar Mitzvah, wedding, high school or college graduation party, or a quinceañera, to name a few.

Suppose any of these sorts of events are a high priority for you and a key goal. In that case, it’s important to note and include them in the insurance needs calculation.

Other goals might change that won’t directly impact your child. Consider your retirement date.
Maybe you’d planned to retire at 40 but now plan to work later.

Many families plan to continue working until their kids are through high school or college. 

Another thing to consider is vacation planning. When you’re single or a childless couple, you might travel the world with relatively little care.

With children, more planning is required, and destinations will likely change. Backpacking Europe in your 20s is great, but you probably don’t want to stay in a hostel with a baby.

Maybe vacations become more expensive, delayed for a few years, or are to two different destinations.

A third consideration is moving. I live in the Midwest, and it’s a common goal to buy or rent a place where it’s warmer in the winter or making a move to somewhere warmer in retirement.

This is another goal I commonly see families align with graduation or one that would depend on where their child will live during college.

You should also consider things like what would happen in your household if you passed away.
Maybe your partner stopped working when the baby was born to care for them until they start school.

If you pass away, will they go back to work? Can they quickly get a new job? How much will child care cost in that scenario?

It’s not the most pleasant conversation to consider, but it’s informative to this discussion.

How Much Life Insurance Does A New Parent Need?

Knowing and quantifying your goals is one way to calculate your life insurance needs.

If you have clear and specific goals for your new baby, you can assign values to goals. 

Once that's complete, you can add them up and quantify the amount of insurance you would need to ensure that your family's future is protected if something happened to you.

There are many expenses related to being a new parent; some are more obvious, some not. There are household expenses such as daycare, diapers, formula, tiny shoes, cute baby clothes, accessories, and toys related to having a baby.

Other costs may come with age, such as private school, tutors, sports and activities, college, or a car, to name a few examples.

Let's look at an example: 

Let's say you ultimately want insurance that will pay for all college costs and a wedding for your child, additional child care your spouse would need, and income replacement for yourself.

Let's make up numbers here. For a baby born today, the expected costs to go to college in 18 years is around $220,000 for an average in-state university.

Wedding costs can vary widely, depending on a lot of things really, but let's say $100,000 for a fancy party. Child care varies by area.

Where I'm from, childcare is about $2,000 per month per child or $24,000 per year – so we could say $100,000 for 4 years.

I'll delve into income replacement calculations below, but let's assume you would need $1,500,000 to replace your income.

Add these up, and you'd need $1,920,000 of life insurance. You can't really buy a policy for $1,920,000, so you'd need $2,000,000 of insurance. Seem like a lot? I don't 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 might be is to base the amount on your current income (adjusted for inflation). 

The benefit here is that you’re not itemizing out the goals. You’re merely saying if something terrible were to happen, there would be an income available to your surviving beneficiaries to support themselves. 

This approach may provide a feeling of flexibility and give you the ability not to consider all the possible dire circumstances. That may just be a more manageable approach for you.

To use this approach first, you must decide if the insurance amount is intended to be spent down or if it’s intended to produce income and sustain or grow the value.

If it’s to be spent down, you decide on the income need and multiply that by the amount of time you need it to last. I recommend using an ideal net income level for this calculation. 

For example, let’s say you want $5,000 per month of net income; that’s $60,000 per year. Let’s assume you want that income for 30 years.

Maybe 30 years will align with a pension or social security start date. The date kids will be done with college or another important date.

Just multiply $60,000 by 30, and voila, you would need $1,800,000 of insurance. 

Alternatively, you may decide you want the benefit received to produce income. You could 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 piece here is what income or growth assumption you’ll use.

If you decided an annuity was best for you, you might get a guaranteed rate or assumed rate, and you can use that for your income.

If you invest in equities and fixed income assets, you need to assume a growth or withdrawal rate. The most common rates used in the industry for this are four or five percent. 

You will also need to decide what level of your income you would want the insurance benefit to produce.

Let’s Use The Same Number From The Last Example

Suppose you were going to calculate this in-depth. In that case, it is more complicated as you need to consider the net income desired, then increase for taxes based on this income and other income sources. 

Still, I’m going to ignore that here since it’s way too deep for this blog.

What you’ll do is take the income need and divide it by the payout percentage, or $60,000 divided by 4% (0.04), which comes out to $1,500,000. 

The beauty of the income approach is you don’t necessarily need to confine your insurance to your goals.

Defining an income that you know will be enough to support your family’s lifestyle will give your survivors flexibility in using the assets at the time needed.

It may also be easier to what your income will look like over the next 30 years and try to replace that, rather than choose what your child could want when they’re a teenager.

THE SIMPLY INSURANCE WAY

No Exam Life Insurance made easy.

Agents not required.

Get quotes and sign up online without talking to an agent. But, we are here if you need us. 

Unbiased, expert advice.

Get unbiased insurance education from licensed experts and also avoid dodgy sales calls.

Coverage in minutes.

You can get no exam life insurance coverage within minutes of getting your quotes and applying.

Conclusion - Taking Action

Becoming a new parent is challenging and creates a lot of stress. You lose sleep and have someone else to worry about.

There is financial stress, relationship stress, time strains, and other lifestyle changes. Having a plan can be a huge benefit in coping with these issues as they arise. Part of your plan should be considering what life insurance is appropriate for you and your family. 

As a new parent, you should consider what protections you want for your family. What goals and values do you want to make sure are protected if the worst were to happen to you? Think about these and make sure you are covered.

Quick Disclosures

Securities and investment advisory services offered through FSC Securities Corporation (FSC), member FINRA/SIPC. FSC is separately owned and other entities and/or marketing names, products or services referenced here are independent of FSC.Neither the named representative nor the named Broker/Dealer or Investment Advisor gives tax or legal advice.

This blog is the opinion of Dennis LaVoy, Telos Financial, 409 Plymouth Road, Suite 206, Plymouth, MI 48170, phone number 734-468-3050.


Dennis Lavoy

About the author

Dennis LaVoy is a Chartered Life Underwriter (CLU®), considered the highest standard of knowledge in insurance expertise, and attained his CFP® designation from the CFP Board of Standards. He holds Series 7, 24, and 63 registrations, and is insurance and annuity licensed.


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