Stay at home Moms (and Dads!) – how much money is in your paycheck on payday? Seems like a trick question doesn’t it? We know we need to protect the breadwinner’s salary with life insurance, but how often do we think about replacing the “income” of the stay at home spouse?
I will admit, early on in my marriage, I was one of the doubters. I wanted to do what was best for my family so I dutifully purchased life insurance for myself. This was a great start but seriously short-sided! We had a family at the time and we were lucky that my wife was able to stay at home and watch the kids like she wanted to. By trading her job & salary we saved the cost of daycare. What I failed to realize was that if something unfortunate happened to my wife, I would need to pay for daycare! How exactly would I afford that? The average cost of daycare in the United States is $8,640 per year ($720 a month) according to the US Census Bureau.
Of course, stay at home moms do way more than provide daycare services. The loss of a parent would increase expenses in numerous other areas. I can imagine more eat out dinners and laundry services to name a few. Late nights at work suddenly become a bigger problem requiring babysitters or other family members to step in and help. Final expenses can also drain your savings.
What Type of Life Insurance
There is a lot of debate about the merits of whole life and term life insurance. Whole life is like buying both an investment and life insurance product. It is more expensive to buy. For many people, it is not a cost effective solution. You should consult a financial advisor before purchasing. In many cases I recommend term life insurance, especially if your budget is tight. A good term life insurance policy is always better than no policy at all.
Term life insurance covers you for the term of the policy. You should shop through an independent agent that is allowed to shop for the best policy by comparing multiple insurance agencies and policies.
How Much Life Insurance Do I Need
There are many rules of thumb on how much life insurance you need. Many articles recommend 10 times your earnings. But what do you do for a spouse with no earnings? Another way to estimate life insurance needs is by estimating the total amount of income you need to replace and for how long. Let’s say you estimate that additional daycare costs, meals out and other expenses will cost an additional $30,000 per year. If your children are young, you might need this additional income for 15 years or longer. Ignoring inflation you could roughly estimate your life insurance needs by multiplying the $30,000 by 25 for a total life insurance need of $750,000. By multiplying by 25 we are using the 4% rule to estimate the investment needed to produce $30,000 in income a year.
While these rules of thumb are a good place to start with your analysis, many additional factors can come into play. Will the surviving spouse take some time off of work to care for the kids? How much debt would need to be paid off? Is there a mortgage to consider? What about college savings? By examining these factors, a financial advisor can find the best life insurance policy for you and your family.