About 18 months ago, I was reading a status update posted by one of my friends. She shared that a very close friend had lost her husband. She was not even 30 and now had 3 young children to care for on her own. While she knew she could do that, financially, she was worried. You see, they had no life insurance. Not anything at all. So here she was having to take care of all of the financially responsibilities on her own. She wasn’t sure what she was going to do.
I read that post to my husband. Now, we had life insurance, but reading that made us take another look at the amount. We visited with a friend, who sells insurance, and did some calculations and determined that our insurance was greatly underfunded. That Facebook post was our wake up call and we immediately took the steps to increase our insurance.
When you purchase life insurance, you do not do so in order for your family to be wealthy upon your death. Instead, you purchase it to ensure that your family is well taken care of. Doesn’t the thought of something happening to you and them struggling make you worry? I know it did for both my husband and I. We knew that we needed to make sure we had enough insurance on him so that he could rest at night knowing that I could cover the mortgage, send our kids to school and not have added financial stress on my shoulders should something happen to him.
However, what many people don’t think about is life insurance on a stay at home mom (or Dad). Yes! All Moms and Dads need life insurance! The Life Insurance and Market Research Association reported that more than 10 million Gen X and Y households have no life insurance on the female head of household!!
While you may not bring in additional income, you do a lot for your family. You provide care for your children. You clean your home. You do the laundry. Sure, you spouse could take care of many of those things, but what if he or she needed help? There may be additional child care costs for both before and after school care. He or she may not be able to take care of the house and may need to hire someone to clean it. A stay at home parent provides so much value to a family that you need to keep that in mind when determining the amount of insurance you need.
As you wade through all of the information out there, keep these things in mind:
Determine how much insurance you will need. This is always a tough question as no one “really” knows. Here are two things to keep in mind when calculating the amount you need to purchase.
First option: Income Replacement. This calculation takes into consideration both your age and your income. Start with your age and determine the number of years of income you would need to replace should you pass away. For example, if you are 35 years old, you may determine that you need to purchase insurance to cover 30x your annual salary (30 years of annual income, to take you to retirement). If you are 40, you may need to purchase only 20 or 25x. The only problem with this method is that it is individualized as financial needs vary so much from person to person. It may be better to look at the needs-based method instead.
Second option: Needs Based. This is really a better method as you take into consideration various factors including the amount of your mortgage, your current debt, college costs, child care costs and other needs. Every person’s needs are different, so this really helps you tailor the amount you need to fit your lifestyle.
Decide if you need insurance. If you have no dependents, then there is really not a need to purchase insurance (unless you have no liquid funds your family could use to pay for your burial). However, if you have a spouse and or dependents, you really do need to look at purchasing insurance to protect your family. Only you can make this determination.
Determine the type of insurance you need. There is term and whole-life insurance available for purchase. We actually purchased term for both my husband and I to cover us until the time our children are on their own. At that time, we should have enough saved to cover funeral costs and other expenses. In addition, our children will be out of college and it will be just the two of us.
When you purchase term insurance, you simply purchase the amount of coverage you need for the period of time you need it. These premiums are usually more affordable and you can get locked into your rate for the enter period of the term.
There is also whole life insurance. This is insurance which actually increases in cash value when you make a premium payment. There are too many things to consider when looking at whole life insurance, so I recommend you visit with an agent to learn more.
When it comes to life insurance, it is something you need to consider. It is an expense that I do not mind paying as I know that my family is well taken care of should should happen to either my husband or I. This is a very big decision to make, so it is best you visit with your financial advisor or life insurance agent to determine your own needs.