Before you were a parent, you may not have felt the need for life insurance. But as you enter this new stage of life, you probably feel an immense responsibility to provide for your little one. A new baby is fun and fulfilling, but also will force you to think ahead to the future to make sure your baby is financially secure no matter what.
The last thing you want to dwell on while celebrating a new life is the concept of death, but in the midst of your sleepless nights, think about life insurance and how it would make a difference for your child if a tragedy occurred.
How Much Life Insurance Do I Need?
If you determine that life insurance is the answer to your worries, your next step is to figure out how much insurance is required to adequately provide for your child and their needs. Here are two approaches to calculating the right amount for your situation:
Human Capital Method
The first is the human capital method, where the goal is to replicate the lost income of a spouse until a predetermined age. Here’s an example of this method in action: Let’s say one spouse makes $100,000 per year and we want to replicate their income until the baby turns 18 years old. We would need $1,227,400 in life insurance coverage at a 5% discount rate. In other words, if the spouse were to pass away today, we would take the life insurance death benefit, invest it at 5% per year and draw $100,000 per year until the baby is 18.
Liability Coverage
In the second approach, we would create a household balance sheet and focus on paying off the liabilities in the event of a death. Imagine we have a $500,000 mortgage, $10,000 in credit card debt, and $20,000 in student loan debt for a total of $530,000. We also want to fund our baby's college education, estimating that it will cost $150,000. Using this method, we would need $680,000 in life insurance to pay off the debt and reach our college funding goal.
What Type Of Life Insurance Should I Get?
Once you’ve figured out what you need, you have the task of figuring out the type of policy to purchase. The choice you make will be based on your personal situation, but here are a couple of options to consider:
Term Life Insurance
Term life insurance is usually straightforward and affordable. You purchase a policy with coverage for a predetermined time period, such as 10, 20, or 30 years. If you die during the term, your beneficiary will receive the death benefit. This is a great option if you just want life insurance to pay off liabilities and cover the expenses of raising a child. If you want money available for your beneficiaries regardless of how old they are when you die, consider the next option.
Permanent Life Insurance
As the description implies, this insurance product lasts your entire life. So even if your child is 50 years old when you die, they will still receive money. This type of insurance is more complicated than term life insurance due to its investment component, but the lifelong aspect might be a draw for you, depending on your financial situation and priorities.
What Next?
Once you’ve decided what type and how much insurance to obtain, you need to make sure you’ve taken care of the details, such as naming beneficiaries and setting up an income plan for your children. It’s important to talk to an experienced professional who can help you find a solution that is the right fit for your circumstances and walk you through the process. At HBA Wealth, we want you to have confidence that your children will be financially taken care of if the unthinkable were to occur. Contact me at (626) 529-8347 or email me directly at ricky@hbawealth.com so I can answer any questions you may have.
About Haydel, Biel & Associates
Haydel, Biel & Associates, an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they have built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. They strive to keep things simple and fun to give their clients peace of mind and alleviate financial stress. HBA Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at ricky@hbawealth.com.