Is a 25-Year Life Insurance Policy Worth It for New Parents With $200K in Savings?

A term life insurance policy can be a fantastic investment to give new parents more peace of mind. That said, taking on another monthly expense can be difficult at a time like this, when the costs of necessities continue to surge higher. Indeed, if the cash flow situation is tight and there is a good amount of savings, a term life insurance policy may not always be the best move. But just how swollen should a nest egg be such that one feels confident enough to move forward without a term life insurance policy?

It all comes down to expected expenditures and whether or not the nest egg would be sizeable enough to meet such expenditures indefinitely in the event of the passing of a breadwinner. As always, the numbers must be crunched (preferably with a financial advisor in your corner) and policies should be compared before any contract is inked.

Let’s check in on a very specific case involving an individual who’s expecting a child in a few months.

This Reddit user has a good amount of assets. But it’s not quite sizable enough for peace of mind.

This Reddit user, who recently took to r/personalfinance, is the family breadwinner, has $200,000 in a 401(k) account, $50,000 in a high-yield savings account (HYSA), and $30,000 spread between a Roth IRA and a taxable account. All together, this individual has around $280,000 saved up, which is a respectable sum for a young couple, but not quite enough to support what would be a family of two if our Reddit user were to pass away suddenly. As such, a term life insurance policy sounds like a very good idea, especially given it’s just long enough to cover expenses until the child becomes old enough to sustain themselves. The only question is how much coverage they should get and on what terms.

Indeed, a 20-year term is a cheaper option that also makes a lot of sense. That said, I’d be inclined to weigh the pros and cons of both. At the end of the day, not everyone can become financially stable by age 20, especially if the Reddit user’s child opts to attend college. In my view, a 25-year term seems like it’d offer greater peace of mind since finances could tighten at around college age. So, if our Reddit user can afford the slightly pricier 25-year term policy, I’d say it’s worth sticking with for the added certainty.

A 20-year term could be a great middle ground.

As our Reddit user continues building up their nest egg, a 20-year term with less coverage could make more sense over time. However, as it stands today, a 25-year term could be the better fit. Perhaps using one’s savings to invest in income-producing assets could help one shore up enough extra cash flow to cover the monthly premiums of an extensive term life insurance policy.

The Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD), which currently yields 3.72%, stands out as an investment to jolt one’s passive income without compromising too much on the growth front. If the $280,000 nest egg were invested in the SCHD, it’d produce more than $10,000 annually. Indeed, such a yield-heavy ETF can produce more than enough extra cash to brace for another wave of inflation while covering the monthly costs of a 25-year term life insurance policy (which would amount to $500 or so per year).

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