Insurance is shifting the risk to someone or something that is more likely to be able to handle the catastrophic event. People often insure their life through life insurance, their income through disability insurance, their business through business overhead insurance, etc.
I believe that the life insurance industry, and probably people in general, completely undervalue a stay at home mother or father when it comes the appropriate amount of insurance. It is pretty easy to blame the industry insofar as it only takes a bit of not-so outside the box thinking to come to the conclusion that despite not earning income there is an insurable interest.
The Bare Minimum Amount of Life Insurance for a Stay at Home Parent
Imagine you just lost a parent, what would be the next worst thing that could happen to a child? I would guess having to uproot due to the loss of their home. The instability that may cause in their life feels like it could devastate them for the rest of their life.
With that being said, the bare minimum amount of life insurance that a stay at home parent should have would be enough to cover all of the long term debt of the family. This provides assurance that, at the very least, the children can remain in the same home. At the same time, it will provide cleared up cash flow from the family’s monthly nut. Long term debt, such as a mortgage, usually takes up a pretty large percentage of cash flow.
The Correct Amount of Life Insurance for a Stay at Home Mother or Father
The correct amount needs to take into some considerations that only each person can answer about their specific wants. First and foremost, all long term debts must be paid off for the same reasons as above. After that amount is covered in liquid cash coming into the family’s checking account we then have to decide if:
Surviving Spouse is Going to Quit His or Her Job
If the surviving spouse’s plan is to quit his or her job and become the stay at home parent then the stay at home parent should have had the same amount of insurance (if not more) than what was decided as appropriate for the working spouse. Put another way, you have to insure the wage earner’s salary against both deaths since either death will cause a loss of income.
The amount that you are insuring the wage earner can be done a number of different ways that are beyond the scope of this article (10x gross income, 4% withdrawal rate, pure income from investments, etc.)
Surviving Spouse is Going to Continue to Work
If the surviving spouse is going to continue to work then we need to discuss providing for a legacy as well as a stream of income to help around the house. The legacy part of the equation is derived from what does the stay at home parent want to provide for if he or she were to prematurely die. For example, we already paid off the house, how about college, a gift later on in life, a wedding, etc.
On top of that legacy portion we need to make sure that the remainder throws off enough investment income to provide for child care, at the very least, and at the higher end a stream of reliable income to keep the family above water, monetarily speaking.
There is Almost No Excuse Not to Have the Correct Amount of Life Insurance
I am not going to go too deep on the type of insurance as it is probably beyond the scope of this blog post, but for most young families with no outstanding health issues, term insurance is cheap. If you have an iPhone with unlimited data and then say you can afford life insurance you are lying to me…and worse lying to yourself at the detriment of your family!