Published September 12, 2016|7 min read
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If you’re a parent, you need life insurance. After all, in between all of the loving, snuggling, and playing, you’re doing a lot for your kid behind the scenes: paying for their home, their clothes, their food, saving for their college, and more. That’s probably why it can cost nearly $250,000 to raise your little one until the time they turn 18 years old.
And that’s just one kid. Think about what that means every time you add a new bundle of expenses joy to your life.
Any time experience a big life event, you need to reevaluate your life insurance needs alongside your future financial plans. Here’s how to buy more life insurance when you’re expanding your financial safety net to including another child:
Buying more life insurance coverage is easy. Remember the way you did it the first time? Compare quotes, apply, go through the underwriting process, and get covered?
This is basically the same thing. But this time it should be easier and you might be able to save some money.
You can either replace your existing policy with a new one, or you can buy an additional policy (while keeping the current policy and building a ladder of coverage to protect your family). A ladder strategy is a great way to layer multiple life insurance policies on top of each other to ensure high levels of coverage during your biggest periods of debt and avoid paying for coverage you don’t need later in life (read: money-saving opportunity). We’ll go into this cost-effective strategy in more detail below.
There are pros and cons to replacing your existing policy with a new one, but the important thing is that your life insurance covers your financial needs. If you do decide that you don’t have enough coverage, you can replace your current policy or simply buy an additional policy to work alongside your old policy. If you need to replace your current policy or buy a new one, you need to be careful of two things in particular.
First, since you’re older than you were the first time you bought life insurance, it’ll probably be a little pricier. Second, you’ll need to disclose your existing life insurance policy when you apply so the insurer can make sure you aren’t buying more life insurance than you need (or is legally allowed). You’ll need to disclose your financial situation like your savings, assets, and debt – the same sorts of things we ask about in our insurance checkup – to make sure you’re getting the proper insurance coverage.
If you decide to buy an entirely new policy, you might think that it would be prohibitively expensive. But by layering life insurance policies, you can actually save money in the long run with term policies lasting different amounts of time.
Let’s say you already have a 30-year policy that you bought when you were 30 years old. You locked in your rates at around $35 a month, but it’s only a $500,000 policy because you bought it when you only had one child. You’re 35 now, and with that extra kid you want another $500,000 worth of coverage.
You have three options:
Option 1: Ditch your old policy and buy a new one. A 25-year, $1,000,000 policy will cost you around $70 a month. That works out to $21,000 over the life of the policy.
Option 2: Buy an additional $500,000 policy. If you’re older but only buying the new policy for another 25 years, it’ll cost you around the same $35 a month that the $500,000 you’re keeping does. Over the next 25 years, the combined rates will also run you around $70 a month, meaning it costs about the same as Option 1.
Option 3: Buy two additional smaller, shorter-term policies. In this scenario, you buy a 10-year, $300,000 policy and a 15-year, $200,000 policy, each for around $11 a month on top of your $500,000 policy. For the next 25 years, that combined protection will only cost you $13,800.
Option 3 saves you money because you’re stepping down your protection over the years. While your kids are younger, you’re just getting into your mortgage, and you’re finishing off your student loan debts, you’ll need a little extra protection. As you get older, you pay off your debts, and the kids move out, you can drop the additional $500,000 and go back to your original coverage until it expires, too.
If you don’t want to buy a new or additional life insurance policy, you can also use riders you have on your policy to increase your coverage.
Life insurance riders are additions to your policy that let you customize it to fit your needs. For example, riders can give you access the death benefit early in the case of chronic illness and mounting medical expenses. When you’re having another kid, there are two riders in particular that can help secure more coverage, depending on your carrier and policy type.
The first has a few different names, but it’s typically called a guaranteed insurability, additional purchase, or renewal provision rider. Instead of buying an entirely new life insurance policy like we just described, this rider will let you increase the size of the death benefit on your existing policy without needing to go through the underwriting process again. Remember how we said that getting older would increase your rates on a new policy? You won’t have to worry about that if you have a guaranteed insurability rider in place on your policy.
When you can add additional coverage – whether it’s at specific times or after certain events (like having a kid!) – depends on the option dates on the rider. The amount you can add will depend on the size of your policy. Be sure to check your policy or with your agent for a guaranteed insurability rider before you go shopping for an entirely new policy.
The second rider is a little different; a child rider is technically adding more protection, but it’s in the case of your child dying rather than yourself. You don’t need to buy life insurance policies for your children, but a child rider on your policy can add a little peace of mind. You can read all about them here, but the gist is that the rider will cover all of the children in your household in units of $1,000, usually for between $5-7 dollars per unit. That means $10,000 of coverage will cost around $50 a year, or just over $4 a month.
It’s important to note that a child rider isn’t a substitute for reevaluating your insurance needs and buying more coverage for yourself. It can be a good addition to your increased policy, but it likely isn’t nearly enough to protect your entire family, so don’t let it be the only change you make after you have another child.
But how much more life insurance do you actually need? After all, you likely already have some protection if you bought life insurance when you had your first child. So how much more is enough?
To figure that out, you need to do what you did the first time you bought life insurance: map out your expenses, both immediate and future, and calculate how much money your family would need to continue covering them without your income. When determining what additional expenses will come with your new child, you should consider:
Everyday expenses. In the first year of a baby’s life, parents will spend an average of $12,000. That goes up to $12,500 in year two. And it doesn’t really slow down, as they’ll always need food, clothes, school supplies, and more. Each additional child adds to these costs, so your basic budget is a good place to start for determining what you need to cover.
Your mortgage. You don’t want your family to have to leave their home if you aren’t around to make mortgage payments. If you’re having another child, that might mean an upgrade to a larger home. When you’re rethinking your life insurance needs, make sure you take a bigger mortgage into account if that’s the case.
Other debt. Student loans. Auto loans. Credit card debt. Besides your mortgage, there are a lot of things you’re on the hook for while you’re living that your death could leave your family on the hook for. But you also could have paid off a lot of your debts since the last time you bought life insurance, so take that into consideration, too.
College. The average cost of higher education will double (or more) over the next 20 years. You can get a good head start with something like a 529 plan – a dedicated college savings account with some great tax benefits – or investing with Wealthfront or Betterment, but your kids will likely need more contribution over the years. Covering that expense can ensure that they aren’t left out in the cold when they turn 18.
Other dependents. Your partner and children may not be the only ones depending on you. If you take care of an aging parent, or plan to, you’ll need to make sure you account for that when you’re adding up the expenses of another child.
Having another child won’t change all of your expenses. For example, maybe the house you had when you were a family of three was already big enough for a family of four. Maybe you had that minivan ready to go and didn’t need to upgrade. But you’ll still need to make adjustments based on the increased everyday costs you’ll have.
You can use our insurance calculator to figure out what your assets, debts, and expenses will be, along with what insurance coverage you already have, and we’ll let you know where your protection gaps are. Once you know that, you can buy additional coverage to complete your safety net.
It’s good to review your life insurance yearly to make sure you have the coverage you need, and especially when you have a major event like adding another child to your family. It’s also not a bad idea to review your beneficiaries on not only your life insurance policy but your will as well, since you’ll now have more people who will potentially benefit from being in those documents. Overall, it’s important to take an active approach to your financial safety net so that if the worst happens you can be sure that your family is protected.
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