Some families choose to have one parent work outside the home while the other stays home to take care of children and household responsibilities. Other families are forced into such a situation by limited childcare availability or other circumstances. In either case, most people would agree that the wage earner in any family should have life insurance protection. After all, how would the family survive without a breadwinner's income?
What About the Spouse at Home?
If something were to happen to a stay-at-home spouse, it would be emotionally devastating for the surviving spouse and children. There are, of course, many emotional repercussions of such a tragic loss to a family. But there could also be a tremendous financial impact, as well. During the difficult adjustment time, there could be a real need for someone to help out in caring for the children and home. Often, friends or relatives will step in to assist during the first few crucial weeks.
But eventually, they will need to return to their regular lives-and the surviving spouse will need to return to work. At that point, the only recourse may be to hire professional services. And this could present a financial hardship.
The Valuable Contribution of the Stay-at-Home Spouse
While everyone recognizes the vital role of the family homemaker, few people stop to think about the cost of services performed by the stay-at-home spouse. This includes childcare, looking after the home, preparing meals, and many other time-consuming activities, like carpooling, laundry, and grocery shopping. The average price of full-time care for an infant in a center was as high as $15,895 a year.1
Despite the importance of the stay-at-home parent, there's little research to quantify its value. In its May 8, 2008, Mom Salary Survey, Salary.com reported the ten most popular functions performed by mothers equates to $116,805 per year vs. a working mother's salary of $68,405. It further states the stay-at-home spouse works a 94-hour week, serving as housekeeper, teacher, cook, psychologist, and van driver - in short, functioning as a CEO at home.
That's why it's crucial for a stay-at-home spouse to have his or her own life insurance protection. It's hard enough for a family to deal with the emotional repercussions of losing a parent/spouse. It shouldn't be compounded by having to grapple as well with the financial hardships such a loss can bring.
How Much Life Insurance Do You Need?
There are no hard and fast rules for determining how much life insurance is enough, because no two families have exactly the same needs or resources. As a general rule of thumb, though, the appropriate amount of insurance protection could equal up to an individual's annual salary times the number of years before the youngest child is out of college, depending on other available income or resources.
When calculating an amount for a stay-at-home spouse, the annual financial value of the services they provide should be used. Let's say you determine that the financial value of the services a stay-at-home spouse provides for your family equals $50,000 a year. If your youngest child will finish college in 15 years, the appropriate amount of insurance protection needed for the stay-at-home spouse would be approximately $750,000, depending on other available income or resources.
Some other things you might consider in determining an insurance amount include funeral costs, medical expenses, probate fees, estate taxes and inflation. Your insurance agent can help you determine how much life insurance you will need.
Your Life Insurance Choices
There are two basic types of life insurance protection for you to choose from--term and permanent.
Term insurance provides affordable coverage for a specific number of years. This is often the choice when protection needs are high for a limited period of time and affordability is an issue. Term insurance allows you to obtain crucial death benefit protection at a lower cost than permanent insurance.
There are term policies ranging from 5 years to 20 years. Many of these are renewable. Also, if you purchase a term policy that is convertible to permanent life insurance, you can get the insurance protection you need today with the ability to obtain permanent protection in the future, without proving insurability.
However, a term policy is only in force for a specific time and once it expires, you lose the death benefit. In addition, if you plan on renewing your policy for a number of years, the long-term costs could be extensive.
For example, if someone buys term insurance in their 20s, by the time they are in their 50s the cost of term insurance probably will have outstripped the cost of permanent insurance coverage. If you choose to purchase term insurance, it's important to find a policy with a conversion privilege, which allows you to convert your term policy to a permanent policy without submitting evidence of insurability. When you convert to a permanent policy, coverage can never be cancelled, provided premiums are paid. This valuable feature generally is available within the first 10 years of the term policy.2
The other option is permanent life insurance. Permanent life insurance provides protection for your entire life (provided premiums are paid) and accumulates cash value tax-deferred. This cash value can be borrowed against in times of need--such as for funding education, buying a home, and supplementing retirement income- although any unpaid loans accrue interest and also will reduce the policy's cash value and death benefit.
Unlike term, many permanent policies enable you to "lock in" the premium amount for the life of the policy. Other plans can offer different levels of premium and benefit flexibility, which you can adjust to suit your needs.
There are pros and cons to each type of insurance protection and the best option for you depends on your needs. However, if the choice is between term coverage and no coverage at all, term is likely the better choice.
A Range of Options
There's a wide range of term and permanent life insurance products available to meet your specific needs. Your life insurance agent can explain the choices available to you.
The Advantages of Riders
Policy riders--available with both term and permanent life insurance --enable you to customize your policy, lock in additional insurance coverage for down the road, or obtain other important benefits that help you meet your short- and long-term goals. By adding riders to your life insurance policy, you create a policy that can meet your changing needs and grow along with you and your family.
Remember Your Work-at-Home Spouse in Your Insurance Planning
It can be very easy to overlook the financial contributions of a work-at-home spouse--that is, until the person is gone. If you or your spouse decide to remain at home to care for your children, don't forget that the contribution of the stay-at-home spouse can equal tens of thousands of dollars a year. The loss of a parent is hard enough on a family; purchasing insurance coverage for a stay-at-home spouse can help ensure that it doesn't become a financial hardship as well.
1"Parents and the High Cost of Child Care: 2009 Update," National Association of Child Care Resource & Referral Agencies (NACCRRA)
2Conversion periods vary by term product.
This material is being provided for informational purposes only. Neither New York Life nor its agents provide legal, tax or accounting advice. Please contact your own advisors for legal, tax and accounting advice.
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