Life insurance premiums aren’t exactly fun to pay. It’s something you never expect to use, which can make it difficult to keep the benefits of having it at the forefront of your mind. Yet, it’s a critical component of any healthy financial plan. It provides a safeguard for lost earning potential in the tragic event should the insured pass away unexpectedly. Often overlooked is the importance of protecting a stay-at-home parent with his or her own policy. This can be a big mistake.
While life insurance premiums are not fun to pay, the truth is that they really aren’t as bad as most people think. A healthy 30-year-old female can get $500,000 of 20-year term coverage for as low as $17 a month! That’s less than one Starbucks coffee a week. Now, I know I probably won’t convince you that paying life insurance premiums is fun, but hopefully I can show you that it’s well worth the trouble.
You Don’t Need To Earn An Income To Provide Economic Value
Stay-at-home parenting is one of the most challenging and respectable jobs out there. My wife stays at home with our three kids. She is a chef, driver, housekeeper, psychologist, tutor, facilities manager, daycare teacher, and so much more. She’s basically a superhero, and she defrays a huge amount of would-be expenses for our household along the way.
Hands down, if we were to ascribe a market wage to all she does for our family it would easily be over $100,000, especially considering the amount of overtime she puts in. No wonder I feel like I won the lottery with her.
Make no mistake, every stay-at-home parent I know seems to have superpowers, too. Hiring out the tasks they perform day-in and day-out would not be cheap, which is the primary reason they need life insurance coverage as much as the household’s breadwinner does. This is the obvious and most straight-forward reason to insure them, but with it comes several other benefits that are worth mentioning.
More Reasons To Insure Someone Without An Income
Taking out a life insurance policy generally requires a health screening. Your current state of health factors into your rate. Because of this, it can be difficult to qualify for life insurance when you are ill. By taking out a policy on the stay-at-home parent, you are locking in rates at their current age and health. By opening and keeping the policy, you are guaranteeing their insurability into the future, even if their health deteriorates.
Leaving a Legacy
In the event of the insured’s death, life insurance policies will pay out the ‘death benefit’ in a lump sum. This payout is generally tax-free. The payout can be substantial depending on the amount of the policy. This creates an opportunity to leave a legacy that honors and memorializes the lost loved one. This could be a one-time donation to a church or non-profit that was of importance. It could also open the possibility of establishing a private foundation or donor advised fund in their memory to support causes they cared about.
Peace Of Mind
The loss of a loved one is catastrophic enough in and of itself. Adding on the financial burden of losing someone that was providing for the family adds an extra layer of intense pressure during an already unimaginably difficult time. Having the death benefit available can enable the surviving spouse to take time off of work and give them the freedom to grieve and figure out their new family situation without financial pressures.
How Much Insurance Do You Need?
Knowing how big or small of a policy to retain for a stay-at-home parent can be difficult to calculate since there isn’t a straightforward salary to base it on. Putting together the points above can help guide you to the right level.
First, each household should think critically about how the loss of either spouse would impact their financial situation. If the unthinkable happened, what new run of expenses would you need to incur on a regular basis? Would you eat more meals out, hire a nanny, or need a cleaning service?
Try to come up with a rough monthly run-rate. Take note of when there could be significant changes to this. For example, the kids may soon be past the age of needing full-time daycare or perhaps they are about to graduate from high school and start college, etc.
Don’t worry too much about inflation or what these services will cost many years from now. Since the death benefit is paid out as a lump-sum, most of the funds can be invested to keep up with inflation.
Next, if the stay-at-home spouse may eventually return to work, then consider how important guaranteeing insurability of their expected future salary is. Use their monthly expected income if the number is higher than the run-rate calculated above.
Consider legacy last. How important would it be for your family to do something charitably as a way to help leave a legacy, and at what scale would this be most meaningful?
Use these factors to guide what the appropriate death benefit should be. Your financial planner is a great resource to help think through this and sort out the many different variables.
Real Life Examples
Let’s see what this would look like in real life:
Example 1: A married couple in their 30’s with two young kids at home decides that about $50,000 a year for the next 15 years would be adequate to cover what the stay-at-home parent is currently doing. Additionally, the stay-at-home parent is significantly involved in the youth ministry at their church. They would like to be able to give their church a special gift of $100,000 designated for the youth program in the event that the spouse passes away. Based on this, they determine that a life insurance policy that carries a death benefit of $850,000 is sufficient ($50,000 x 15 years + $100,000).
Example 2: A couple in their 40’s has three kids that are currently in high school. They regret that they haven’t yet been able to save anything to help their kids with college. Between their mortgage, auto loans, and some credit card debt, they have a combined $350,000 balance in outstanding debt. They decide that a $500,000 death benefit would allow them to pay off all outstanding debt while also making a sizable contribution to each kids’ post-secondary education. By paying each loan off in full, they would eliminate monthly payments of about $2,500. The working spouse would then be able to keep their job and use the now freed up $2,500 to cover the increased expenses around the house.
Get Started Today
What you start to see from these two examples is that every situation is unique. The right level of insurance for a stay-at-home spouse, therefore, depends on each family’s distinct circumstances. The common denominator is that a proper level of insurance meets the family’s needs and gives them confidence about the future.
I said at the beginning that I probably wouldn’t convince you that paying life insurance premiums is fun. Hopefully, what you have seen is how valuable it can be for any family, regardless of who the wage earner is, to carry life insurance on both parents. Insuring a stay-at-home parent with an appropriately-sized life insurance policy ultimately brings great peace of mind. And that’s worth quite a lot!
When deciding how much life insurance to purchase, it helps to work with a trusted financial planner. If you don’t already have an advisor, I’m here to help. Click here to schedule a free 30-minute phone call where we can discuss your unique situation along with your aspirations. Also, I don’t sell life insurance or earn commissions, so you know I won’t have any conflicts of interest when giving you advice!
About Wacek Financial Planning
Founder Ben Wacek is a fee-only Certified Financial Planner™ and Certified Kingdom Advisor® who has a passion to help people of all income levels make wise financial decisions and steward their resources from an eternal perspective using Biblical principles. Based in Minneapolis, MN, he works with clients both locally and virtually throughout the country and abroad. If you’d like to learn more about Wacek Financial Planning, please visit www.wacekfp.com.
Photo by timkraaijvanger from Pixaby.