How Much Life Insurance Do New Parents Need?

New parents will experience a seemingly endless set of changes in their lives, not the least of which are the financial changes and new financial responsibilities that arise. For new parents who just had their very first child, the issues that arise can seem overwhelming. One of the first things new parents will need to do is purchase life insurance.

The process for taking out new life insurance policies is straightforward, but almost as soon as you begin you’re faced with a single question that will end up driving the rest of the insurance buying process: how much life insurance do you need? Simply choosing a large, round number without any consideration or analysis could easily end up either providing you with inadequate coverage, or too much coverage (which costs you too much in premiums).

I’ll provide two different methodologies to answer the question on how much life insurance you’ll need. First I’ll discuss a simple method to help decide the bare minimum or “Basic Coverage” amount that everyone should have. Second I’ll discuss a more “Comprehensive Approach” to calculate how much life insurance (a “nice to have” level of insurance) you might wish to purchase.

If you only have a minute or two just read about Basic Coverage, but if you want to feel more comfortable about your life insurance coverage please read and use the Comprehensive Approach.

1. Basic Coverage.

There are several different rules and guidelines you can use to follow to determine what’s an appropriate minimum amount of life insurance for you. One tried and true method is the “Rule of 10.” Simply take your annual income, multiply that amount by 10, and that’s the payout amount to look for in a life insurance policy.

If you’re a couple, then both parents should be insured — even if only one parent works outside the home. Another basic option is to take the 10x amount you computed and include an additional $100,000 or $200,000 for each child to cover future college expenses.

For example, if you and your spouse have a child, and your annual income is $65,000 per year (while your spouse does not work), then you should look to purchase a $650,000 life insurance policy for each of you (with an additional $100,000 or $200,000 of coverage of coverage for your child’s future education).

2. Comprehensive Approach.

The major downside of the method outlined above for calculating basic life insurance coverage is that it can oversimplify the financial needs of many individuals and families, resulting in a coverage that’s potentially more affordable, but potentially inadequate.

In order to make sure you’re covered with the most appropriate level of life insurance, look more closely at your current financial situation. There are four areas of your personal finances to examine, and for each you’ll come up with a dollar figure that you can record in the blanks provided.

(a) Identify and quantify all of your debts (besides your mortgage), including your credit card debt, outstanding auto loans, student loan debt, retailer charge card debt, plus any other personal debts you have. Also include the estimated costs for your funeral (often in the $10-$20,000 range, although if you have specific or unique needs for your funeral then this might be a greater amount) in this total.

Section (a) Sub-Total: $__________.

(b) Take your annual income and multiply it by the number of years any life insurance payout would have to support your family. (This is often equal to the number of years before your youngest child graduates from high school.)

Section (b) Sub-Total: $__________.

(c) How much money would be necessary to pay off your home mortgage (or, if you’re currently renting, how much would it cost to purchase a comparable residence for your family)?

Section (c) Sub-Total: $__________.

(d) Rather than use a flat amount for how much your child’s higher education expenses, do a little research and determine how much your child’s likely or preferred college or university actually costs. Look back at how much these costs have increased over the last few years; you may want include a larger amount in your coverage requirements in order to anticipate future cost increases.

Section (d) Sub-Total: $__________.

Now add each of the section subtotals above:

(a): $_______ + (b): $_______ + (c): $_______ + (d): $_______ = Total Coverage needed: $__________.

This total coverage amount is the dollar value of the death benefit you should have on your life insurance policy. This method of calculating your life insurance needs is going to take into account most of the various financial obligations you have to your new child and your family, which your life insurance policy is meant to replace.

Comparison Shop.

You’re certain to comparison shop among different insurance companies once you’ve calculated the amount of life insurance you need. But for each insurance company you’re considering, also be sure to compare the policy with a benefit amount just above your desired amount.

You may find that for a relatively small premium increase you’ll be able to obtain a policy with a significantly larger benefit amount, thereby providing your family additional protection at a relatively small cost increase.

Existing Life Insurance Coverage.

Prior to purchasing any new life insurance policies, investigate whether or not you or your spouse already have some amount of life insurance coverage. For example, your employer may have provided you with a life insurance policy when you first started your job. (These types of policies are sometimes offered in amounts that are 1x or 2x your annual salary.) It can be easy to forget about these policies, particularly if you began working a number of years before your child was born.

Don’t Make Your Life Insurance Decisions Just Once.

If you take a look at the different ways I’ve discussed for calculating what’s an appropriate amount of life insurance to carry once you become a parent, you’ll notice that many of the individual factors that go into the calculation can change over time. For example, as you advance within your career and your income rises, or you move to a larger home, it’s likely that you need to increase your policy coverage.

After you have a child and you obtain your first life insurance policy, be sure to review the amount of coverage you carry at least every year or two.