Life insurance is a crucial financial tool that safeguards your loved ones in the event of an unexpected tragedy. Yet, as life progresses and new family members enter the picture, the question often arises: should you increase your life insurance coverage? The answer to this question is contingent on your individual circumstances.
In this article, we’ll explore whether having another baby necessitates purchasing more life insurance and how to go about it.
The DIME Formula
When determining the appropriate amount of life insurance coverage, many financial experts recommend following the DIME formula:
- Debt: Life insurance should be sufficient to pay off any outstanding debts left by the deceased.
- Income: It should replace the deceased’s income for as long as necessary to support the family.
- Mortgage: The policy should cover the mortgage on the family home.
- Education: Ensuring there are enough funds to cover the education expenses of minor children is crucial.
Expanding Family, Expanding Costs
The arrival of a new baby often brings an array of additional expenses. For instance, the average cost of college tuition has surged to approximately $36,436 annually per student, with projections suggesting further increases. Moreover, education costs don’t commence with college – parents must also consider preschool and possibly private school expenses, along with extracurricular activities.
In addition to educational expenses, raising a child entails numerous financial responsibilities. According to estimates from 2022, the cost of raising a child in the United States stands at approximately $310,605. New parents must account for these added budgetary demands.
Furthermore, the birth of a child may prompt the need for a larger home to accommodate the growing family. It could also lead to increased reliance on a stay-at-home parent’s services or the primary breadwinner’s income.
Considering all these factors, purchasing additional life insurance coverage when a new baby arrives may be a prudent decision. However, the necessity for more insurance depends on the existing coverage. Since life insurance is more affordable when acquired at a young age, some individuals may have already secured sufficient coverage for multiple children when they initially purchased their policies.
Assessing the Need for More Coverage
To determine if additional insurance is required, revisit the DIME formula. If the introduction of a new baby alters the calculations, necessitating more income or services, acquiring additional coverage is advisable.
Getting More Coverage
Expanding your life insurance coverage isn’t always a straightforward process. You can’t merely call your insurer and request an increase in the death benefit, as premiums are based on age and the desired coverage at the time of purchase. Some insurers may offer the option to purchase a predetermined amount of initial coverage without undergoing a full underwriting process, but this typically results in a premium increase.
If the existing policy’s death benefit cannot be increased sufficiently, obtaining an additional life insurance policy may be an option. However, this would involve a new underwriting process, potentially leading to disqualifications due to pre-existing conditions or higher premiums because of age.
Ideally, it’s best to ensure you have adequate coverage from the outset, anticipating future life events. If that ship has already sailed, perform a careful assessment of the coverage needed after a new baby’s arrival and explore options for augmenting protection if necessary to secure the financial future of your growing family.
