Nov. 12, 2020
One of the primary reasons to buy life insurance is to help replace your income if you have loved ones who count on you for financial support. But if you’re not working at a paying job, should you even bother getting coverage?
In a word, yes.
Because couples often assume that only the income-earning parent needs life insurance, they often skip out on coverage for the stay-at-home parent, says Jason Hill, CEO of Client Focused Advisors and founder of CFAInsure.com.
It’s a mistake, though, to overlook the financial support that a stay-at-home parent provides.
“If I had to replace what my wife is doing, it would cost me a fortune,” says Hill, whose wife is a stay-at-home mom.
How Stay-at-Home Parents Provide Financial Support
Although stay-at-home parents don’t bring home a paycheck, they provide substantial support for their families. If they weren’t around to take care of children, make meals, run errands or manage other household tasks, someone would have to be hired to fill those roles.
Salary.com estimates that the median annual salary for all of the jobs that stay-at-home moms perform is $178,201. Granted, you wouldn’t necessarily have to hire someone to handle some of the jobs that Salary.com included in its estimate—such as a judge, logistics analyst or social media specialist.
But you would have to pay for day care or a nanny if something were to happen to the stay-at-home parent in your family. And that’s a pretty hefty expense by itself.
According to Care.com’s Cost of Care Survey, the average weekly cost for a child care center was $215 in 2019. The average weekly cost for after-school care was $243, and the average weekly cost for a nanny was $565. Based on these figures, a family could pay an average of $11,180 to $29,380 a year per child for childcare. And child care costs are only rising over time.
That’s a cost the working parent would have to shoulder if something happened to the stay-at-home parent. If that parent had ample life insurance, the death benefit could cover the cost of childcare so the family’s finances wouldn’t take a hit.
Other Reasons to Consider Life Insurance
Not only will a life insurance payout provide the surviving parent with the funds to cover child care costs, but also it will help cover final expenses. The median cost of a funeral with burial is $7,640, according to the National Funeral Directors Association. This does not include cemetery, monument or marker costs. Plus, there could be lingering medical bills or other expenses that need to be covered.
In addition to providing a financial safety net, the stay-at-home parent might also want a life insurance policy to leave a legacy for the children, says Stephen F. Lovell, president of Lovell Wealth Management. By putting life insurance in a trust for your children, you can pass on an inheritance to them.
And while it’s not a reason that people buy coverage, having life insurance in case of a divorce is valuable. It’s better to get coverage while you’re young and healthy because you can qualify for a lower rate, says Lovell, no matter what your reason is for buying coverage. If a divorce happens later, either parent without a policy might find it difficult to find affordable coverage at that point—or even get coverage if she or he has developed health issues.
How Much Coverage Do Stay-at-Home Parents Need?
When figuring out how much life insurance you need, income often is a key consideration. That’s because you want a death benefit that will replace your salary for a certain period of time that you choose.
Coming up with a coverage amount might seem like more of a challenge if you’re a stay-at-home parent without an income. There is no one-size fits all approach, Hill says. But there are a few key questions you can ask yourself to determine how much coverage you need.
How many children do you have? “The bigger the family, the bigger the life insurance policy that family should have,” Hill says. That’s because child care costs will be higher. Find out the cost of childcare facilities, after-school care or a full- or part-time babysitter where you live.
You’ll want to have a life insurance amount that’s large enough to cover that cost for all of your children until they’re old enough to no longer need care. If your spouse will need to hire a house cleaner, lawn mower or others to handle the tasks you currently manage, factor those costs into your life insurance calculation, too.
Will you return to work? If you plan to return to a paying job, consider what your income likely will be. That’s because your household spending will likely rise as your income does, Hill says.
You’ll want enough life insurance to replace the income you expect when you return to the workforce so your family can continue living the lifestyle they’re accustomed to. By getting ample coverage now, you can lock in a lower rate than what you’d pay if you waited to buy more coverage upon returning to work.
Ideally, you should work with a financial advisor who can help you review your household assets and expenses to calculate how much coverage you need. You can find a fee-only planner through the National Association of Personal Financial Advisors or a planner who charges by the hour through the Garrett Planning Network.
What Type of Life Insurance Should You Buy?
There are two primary types of life insurance: term life and permanent life. A term life policy provides coverage for a certain period of time—typically 10, 15, 20 or 30 years. A permanent life insurance policy provides lifelong coverage. The type you choose will depend on your family’s financial situation and goals.
The Case for Term Life
Hill says that he typically recommends that stay-at-home parents buy a term life policy because it’s an affordable way for families to get the protection they need. For example, a healthy 30- to 35-year-old woman could get a 20-year term life policy with a $500,000 death benefit for about $20 to $30 a month, he says.
You can choose a term that’s long enough to cover the years until all of your children have graduated high school or even college. Then you’ll know that funds will be available to pay for your children’s care if something were to happen to you while they were young.
The Case for Permanent Life
A permanent life insurance policy—either whole life or universal life—will cost more than a term life policy.
Permanent life insurance can make sense for higher income families who have covered other financial planning bases, such as maxing out retirement savings, having an emergency fund and saving for children’s college education.
One benefit of a permanent life insurance policy is that it builds cash value. It’s money you can use later in life if the policy builds up enough cash value. For example, you could tap a policy for retirement income—which might be appealing for stay-at-home parents who can’t contribute to a workplace retirement savings plan.
“That cash value policy will give them planning flexibility later in life,” Lovell says.
Still, the high cost of a permanent life insurance policy that will build substantial cash value can be a deterrent to a young family that’s juggling other expenses.
If you are interested in a permanent life insurance policy but can’t afford one now, be aware that term life policies typically offer a term life conversion option that lets you switch to a permanent life policy.
You might be able to take advantage of that option if you go back to work and have a bigger household budget.
Buying a Life Insurance Policy
It’s best to work with an independent insurance broker who can get you quotes and compare policies from several insurance companies. If you prefer to take a DIY approach, shop around for the best policy at the best price.
You will have to provide a lot of information about yourself during the application process so insurers can calculate your rate.
Your lack of income shouldn’t hurt your ability to get coverage as long as your spouse has life insurance. Where you’ll run into problems is if you’re trying to buy a policy but the income-earning spouse doesn’t have one or isn’t also applying for coverage, Hill says.
You’ll also raise a red flag if you’re trying to get more coverage than your spouse has. Typically, insurers will issue a policy for a dependent spouse that’s worth 75% to 100% of an in-force policy on the employed spouse, he says.
If you do run into problems getting coverage, having an independent insurance broker on your side can help. That broker can write a letter to the insurer explaining your situation and why you need life insurance even though you’re not the household income earner.
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