When deciding how much life insurance a person needs, Financial Planners recommend an amount of 7 to 10 times your annual income.
But what if you don’t have any annual income? What if you are a full-time, stay at home spouse and parent? Do you need a life insurance policy if you have no income?
Well, in a way, yes. In fact, as a stay at home spouse or parent, you make hugely valuable contributions to the household. Contributions that could cost thousands should something happen to you.
According to a recent Salary.com survey in 2016, the value of a stay at home parent would be about $143,000 if you had to outsource those jobs. These services include those provided by a typical homemaker which include a housekeeper, child care, a driver for the kids, and more.
But how much does this stay at home spouse or parent need for life insurance? $1,000,000? Probably not. Use the following as a guide.
When deciding on how much life insurance, you can use the Replacement Cost Method.
Step 1 – Calculate what you actually need. Talk with your spouse about what would happen if the stay at home parent passed away. What tasks are handled day-to-day by that person? Make a list and then look into the cost of paying someone to do these functions. Child care, grocery shopping, getting the kids to school, yard maintenance, home maintenance, meal planning and preparation, etc. Then take the cost of those outsourced services into consideration as an annual recurring expense.
Step 2 – Consider the amount, cost and type of life insurance needed. Take your calculations from Step 1 and look at an annual total. Keep in mind that your situation will not remain static – kids will grow up and take on more responsibilities, you’ll adjust to your new life eventually, and expenses will taper off as kids leave home for their next steps in life. So look at the ages of your kids and the timeframe – are they currently in elementary school or are they almost graduated? You may need the life insurance benefit to last just a couple years, or maybe longer.
Once you decide upon an amount, the most popular life option for this is Term Life Insurance, where the annual premium stays the same for a number of years – 10, 15, 20 years. Term Life does not accrue a cash value, so premiums are typically low compared to other forms of insurance.
Another option is Voluntary Spouse Life Insurance available through your employer. This is a low cost life insurance that is payroll deducted. Often you can get a certain amount “guarantee issue” without medical questions asked.
Step 3 – Talk with an Insurance Professional. Talking to a trained professional can help you fine tune the amount and type of coverage you need. An insurance pro can check the marketplace for the best deal and show you options to solve your needs.