What would happen to your family if you died? Especially if you’re the primary earner.
I know a family where the father died and the mother, who had been a stay at home mom since her kids were born, was left nearly destitute. She had no job, no education and little work experience, since she had been home raising kids for the past 15 years.
She didn’t have a lot of options. The sad thing is that it didn’t need to be this way, but this scene plays out daily across the world all the time.
Being a stay at home mother or father is the most impactful and important job there is. As David O. McKay said, “No other success can compensate for failure in the home.” I commend anyone who stays home to raise children and puts their family first.1
If so many of us put our families first, why would we leave our spouse destitute when we die? The simple answer may be the people don’t think they’re ever going to die and don’t plan accordingly or they just don’t want to think about it. It’s not a pleasant exercise planning your estate and what will happen to you and your assets after you die. It’s no wonder people put it off until it’s too late.
Luckily, there’s an easy solution for this. It’s a word many people don’t like to discuss: Life insurance.
For just a few hundred dollars a month, you can ensure your spouse and kids wouldn’t be left penniless and without an income after the death of the primary earner (aka “You”).
How much does security cost?
Let’s look at some numbers.
The average yearly U.S. income is about $51,000. Most people make something around this amount. When that person dies, the family loses that income. Often both the husband and wife work, so they have 2 incomes. Even with a second income, the loss one income is a huge financial loss.
What would it take to replace that $51,000? Using the 4% rule, you’d need $1,275,000 in invested money to ensure you can live off your investments and never run out of money. That’s not including any other income, such as social security, pensions or a business.
That’s a lot of money if you’re saving it up a bit at time. It would take a decade or two for most people to diligently save up that much. However, it doesn’t cost that much to provide that amount to your family in the event of your death via a term life insurance payout.
For most people who don’t have health issues, they can buy a 10 or 20 year term policy for that amount for a few hundred dollars a year. In other words, that’s the cost to make sure your family continues to have your income if you pass away before reaching financial independence. That gives your spouse options to keep paying the bills, take care of the kids or even go back to school to start a new career.
Levels of comfort
When I was a financial planner I talked to families about this a lot. The level of life insurance you want comes in 3 categories:
- Enough money so your family is taken care of for life without any financial worries. Or as we’d joke, enough insurance money to ensure your spouse and her new husband were comfortable.
- A bit of money to give the surviving spouse time to find a new spouse, aka primary earner.
- Lastly, no money at all. The family is on their own.
If you’ve got small kids, I’d always choose option #1, so your family doesn’t have to grieve your loss while also trying to find money to pay the mortgage. Some people don’t like this because they feel they’re paying for a new husband’s comfort, but I think it’s really more about taking care of the kids.
It goes both ways
Term life insurance helps both spouses. For example, my wife doesn’t work and stays home with the kids (which is a lot of work). I’m so grateful she does because our kids will be better off because of it. Aside from the psychological benefits of having a stay at home parent, there’s a financial value she adds by doing that. If I lost her, I’d have to pay for daycare, transportation and much more. Those are real costs.
What is the financial impact of losing a stay at home spouse? Do you want enough money to pay for day care and all the related expenses? We decided we wanted enough so I wouldn’t have to work anymore and I could be that stay at home parent because having someone at home is much more valuable that having just enough money to pay someone else to be with my kids all day at day care. If I could have the option, why wouldn’t I?
Lots of people put their kids in daycare so both spouses can work. Divorced, single parents pretty much have too. That’s a different situation. Life insurance doesn’t help with that. Every time my wife goes to her annual multi-day retreat with her sisters, I empathize with what single parents have to do on their own. I can only imagine how tough it is.
It further solidifies my feelings that I wouldn’t want to be left with no resources, raising kids alone if I could help it. I know my wife feels the same way. Why go through that if you don’t have to?
Set up your family for success
So if you aren’t financially independent yet, sit down with your spouse and make some calculations to figure out what it would take to replace your incomes, even if it’s only until the kids are out of the house or you’ve reach FI.
What have you done to plan for the worst? How do you feel about life insurance? Please share your comments below.