If you’re having a baby, your goal is to live as long as possible to help your child become a productive member of society. It’s rational to start eating healthier, exercising more, and building great wealth. But for some reason, we’re not a very healthy nation with roughly 74% of the American population considered overweight or obese. Neither are we disciplined savers.
Perhaps we can blame subsidized healthcare that doesn’t reward good behavior as the reason we adopt the “ah, screw it give me another cookie” mentality. If the government said I’d save or make $10,000 a year if I was 10 pounds lighter, you better believe your buns of steel I’m going to be 10 pounds lighter!
Or maybe we can blame food and beverage companies who knowingly peddle poison to keep society addicted to their products. Excess sugar is undoubtedly one of the main killers in the world, yet we continue to get bombarded with processed foods just like how Facebook continues to allow fake news to exist all in the name of profits.
I, for one, am not having it anymore once I have a kid. No longer will I selfishly stuff my face with baklava after 8pm. No longer will I spend hours sitting on the couch trying to pound out a post while watching sports. My kid is depending on me!
Life Insurance When Having A Baby
Given one of this year’s main themes on Financial Samurai is family finances, I can’t help but think about the importance of life insurance when having a baby. It pains me to think there’s a chance I won’t be around to hustle for my child once I’m gone. Nobody is going to work harder than me to provide for my family, just like nobody is going to care as much about your finances than you.
Hence, the only way to ensure that my wife and child are taken care of is to create a passive income generating machine that will cover their living costs indefinitely. My wife is the beneficiary of all my assets if I were to pass prematurely. I’ve created a will that clearly states my intentions. Further, I plan to create a trust when the time comes.
But what if you aren’t able to generate enough passive income to provide for your family before you die? Heck, it took me 13 years to generate enough passive income to dare leave full-time work for entrepreneurship. The shortcut way is to get life insurance to pay out to your spouse, partner, or close relative who has the directive to take care of your baby.
There are very few examples where you can simply buy your way to financial freedom. Generally, society encourages us all to get good grades, go to a good school, get a great job, work hard for many years, save as much as possible, and invest prudently to one day be financially independent. With life insurance, you can’t buy your way to financial freedom, but at least you can buy your loved one’s way. If you are going to die anyway, you might as well make a positive out of it.
Questions To Ask Before Getting Life Insurance
Here are some basic questions you should consider before getting life insurance.
Would I want life insurance to help pay off my mortgage(s) so my surviving spouse won’t have to worry about housing expenses?
My answer: Absolutely. After paying off one mortgage in 2015, I’ve still got three mortgages left to pay off (one primary, and two rentals). Two of the mortgages are with properties that generate a positive cash flow, but I don’t want to count on my tenants being there and paying on time forever. My primary mortgage I took out in 2014 is around $895,000 and costs $3,923 a month. That’s one big expense I want covered through life insurance.
What other debts (car loans, lines of credit, revolving credit card, student loans, etc) could life insurance help pay off to make my family’s living situation more secure if I were gone?
My answer: I’ve got no other debts. I paid off both our student debts a while ago. Revolving credit card debt is the worst due to their egregious interest rates.
Could I use life insurance benefits to cover my child’s college expenses if I passed away?
My answer: Definitely yes. It’s not just college expenses I’ve got to worry about, it’s grade school tuition as well. Right now I’m coaching tennis at a private high school where the total cost is $48,000 a year. Private elementary and middle school tuition is roughly $15,000 – $35,000 a year in San Francisco and Honolulu. Therefore, I’ve got to consider paying potentially $500,000 in grade school tuition + $300,000 in college tuition in 3 – 21 years.
What is the gap in living expenses if my family had to just live off one spouse’s income?
My answer: My wife doesn’t have a day job. She retired February 2015 and has been busy being the CFO and COO of our company. We spend $1,400 a month on healthcare alone. If I go down, the main writer goes down. I should consider hiring staff writers and ghost writers as a contingency plan. ~70% of Financial Samurai’s traffic is organic and recurring, so I assume 70% of revenue will stay constant with a gradual fade if no new posts are published. So long as there is a new post published once a month, I’m confident traffic and revenue will remain steady. But who knows for sure.
I absolutely don’t want my wife to have to get a day job if she’s taking care of a young child. She can only if she wants to. The goal of insurance is to provide maximum options and minimal disruption.
Please also go through these questions with your partner.
Term Life Insurance Coverage Needs
Term life insurance is sufficient for the vast majority of families. It’s cheaper than permanent life insurance and does its job with maximum efficiency.
Permanent life insurance can be considered, but only if you have a lifelong dependent (e.g. special needs child) and/or plan to bust through the estate tax (death tax) limit of $10.98 million per couple or $5.49 million for a single person. A spouse does not have to pay estate taxes on money inherited from the deceased spouse. In other words, permanent life insurance can be used as an estate planning tool.
Based on the answers I’ve given above, I need at minimum:
- $2 million term policy to pay off all mortgages and cover all tuition costs from pre-K through college
- 20 – 25 year term policy to last until one child gets through college. I’m sure I will be able to pay off all mortgage debt in 20 years.
I’ve basically decided that equating the amount of life insurance I need with my debt and potential tuition costs is enough due to my existing income streams. However, if you do not have enough passive income, then you should decide how many years of income you’d like a life insurance policy to replace e.g. $100,000 income X 10 years = $1 million policy.
When you buy a policy, you name a beneficiary, such as your spouse, to receive the life insurance money. You should go down the list of people you trust and name them all in order. My primary beneficiary is my wife, then my father, then my mother, then my sister. In some cases you can provide a predetermined split of proceeds to multiple beneficiaries e.g. 50% to wife, 20% to father, 20% to mother, 10% to sister. Just check with your provider.
It’s important NOT to name your baby as a beneficiary, even if you want the money to benefit them. If the beneficiary is a minor when you die, the life insurance company can’t pay the benefit until the court appoints a guardian. Hopefully, the court appoints the right guardian per your wishes, but you don’t want to trust a third party to do something if you don’t have to.
Instead, one option is to set up a life insurance trust to hold money and property for your children and name the trust as the beneficiary. You appoint a trustee, such as your spouse or another adult, to manage the trust according to your instructions. An attorney can help you set up a trust, and the life insurance company can tell you how to word the beneficiary designation.
Get Life Insurance As Soon As You Know
Having a baby is going to be a life changing event. Between months of no sleep, diaper changing, and doctors visits, you want to make sure all your financial ducks are in order before your little one arrives. I’d lock down life insurance coverage as early as the third trimester (start of the 28th week of pregnancy) and no later than after birth. Why risk it?
As a recap, here are some determining factors for life insurance premiums:
- Age: The younger you are the less you pay.
- Sex: Women generally pay less than men.
- Health: The healthier you are the less you pay.
- Smoking habits: Smokers pay more than nonsmokers.
- Hobbies: People with risky hobbies, such as scuba divers, pay more for coverage.
- Education: With the fintech movement, generally the more education you have the less you pay.
- Field of work: Fintech companies are looking for longevity and well-paying fields.
Thanks to SoFi and Protective for sponsoring this post and allowing me to think more deeply about life insurance when having a baby. You can get a free life insurance quote with SoFi, issued by Protective in ~2 minutes. The application process is around 20 minutes if you decide to go with them. You can also get coverage of up to $1M with no medical exam.*
If you’re having a baby or are trying to have a baby, congratulations and best of luck! I know full well how difficult it is to conceive, especially as we get older. Having life insurance when having a baby is all about being a responsible parent who will continue to be a guardian no matter what happens. I’d love to hear from parents or couples trying to conceive how you planned for the financial care of your child.
* Coverage amounts up to $1 million and express application processing may be available to applicants up to 40 years old that meet certain risk and eligibility requirements of Protective Life. Full medical underwriting may be required for applicants that do not meet Protective’s eligibility criteria.