It’s essential to provide for your family in the event of your untimely passing, especially if you have a mortgage. Whether the surviving spouse is a stay-at-home parent or the primary wage earner, they will face significant financial challenges without life insurance. But how do you determine how much life insurance you need?
Why you need life insurance
The premature death of the primary earner, particularly when the surviving spouse is a homemaker who cares for the children, can be disastrous without life insurance. The stay-at-home parent will be forced to put children in expensive child care and go to work, a wrenching lifestyle change on top of the loss of their partner. That spouse must still pay the mortgage and other debts and provide for the family’s daily needs. Without life insurance, the surviving spouse faces a significant financial challenge.
If the stay-at-home spouse dies prematurely, the breadwinning spouse must immediately find child care and someone to perform the myriad tasks the deceased spouse was responsible for. Again, it will be difficult to cover these expenses without coverage.
Do the math
The shorthand means of calculating how much life insurance the primary breadwinner needs is multiplying their annual income by 10. If you earn $70,000 in a year, for example, you should purchase $700,000 in coverage. Some experts advise buying as much as 12 times the annual income. With this much life insurance, the surviving spouse could, with professional advice, invest the payout and mostly live off the income stream, leaving the bulk of the principal untouched for many years.
That’s the shortest calculation. The longer, more detailed one is to total the following:
- Total mortgage balance owed.
- Total of car loans and other debts owed.
- Annualized cost of living.
- Future cost of college for each child.
- Annual income multiplied by the number of years of income you want to replace.
Then subtract the amount of liquid assets you already have saved.
To determine how much life insurance is needed for a stay-at-home parent, consider the cost of hiring someone to perform the tasks that the person handles. The cost of child care, cleaning services, meal preparation, home maintenance, and other roles are substantial, so you must buy sufficient life insurance to cover all of them.
As the years go by, your savings and investments grow, your kids finish college, and your debt burden decreases so that you can reduce your coverage.
What kind of life insurance should you buy?
Term life insurance is the least expensive. In your 20s and 30s, you can buy $500,000 in term coverage for very low rates. It’s best to buy a “level term” policy that locks in your annual rate for 20 to 30 years. Whole life insurance, which operates as a savings and investment vehicle as you pay premiums, is also available. However, the premiums are more expensive and provide less coverage. You can obtain a better return on investment by buying term insurance and investing in premium savings.
Related – Remember: Your Insurance Needs Change Over Time
