Young families, ages 21 – 45, tend to have the greatest need for life insurance. Why? The answer is quite obvious to anyone who actually fits the definition of a “Young Family”. During the “young family” stage, couples are typically just starting in their respective career(s). Young families are also creating the family by having children. Young families are also dealing with a huge amount of debt (home, car, student loans, braces, etc.). While determining the amount of life insurance necessary may vary from advisor to advisor, there are “standard” calculation methodologies present. The problem comes when one of the parents does not “work” outside of the home.
While the “Stay At Home Mom” may be less prevalent than she was twenty years ago, there are still a large number moms who “work at home”. As a husband who is lucky enough to have a “Stay At Home Mom”, I know first hand how valuable the job my wife performs on a daily basis is (as a personal side note, I have the utmost respect for any person who chooses to stay at home versus working out the home, yours is a job that goes without thanks or acknowledgment far too often). The problem that must be dealt with is…how much is the “Stay At Home Mom” worth in terms of dollars and cents? The second (and often hardest to overcome) problem comes in convincing both the husband and wife that the “Stay At Home Mom” NEEDS life insurance. Let’s tackle each problem individually.
Problem One – How Much Life Insurance Does The Stay At Home Mom Need?
The fundamental problem with life insurance is determining the amount of coverage any individual needs RIGHT NOW! In determining the amount of life insurance someone needs, a Professional Life Insurance Advisor will do what is called a “Needs Analysis”. The Needs Analysis may differ among Advisors and/or Life Insurance Carriers, but the general items stay pretty consistent.
Final Expenses (Funeral Costs, Burial Plot, etc.)
Debt Payoff (credit cards, car loans, student loans, etc.)
Mortgage Payoff (while some may debate this, most advisors use this)
Adjustment Period (typically one years salary)
Education Fund ((Private School costs until graduation when applicable and/or total college costs) X # of Children)
Income Replacement (most people fail to go this far in the analysis, we will discuss this in more detail below)
While most of the needs analysis is pretty straight forward, the final component of Income Replacement tends to be the most overlooked and complicated part. In determining the Income Replacement component, the Advisor attempts to compute how much money, today, it would take to replace the income lossed due to the death of the insured. This computation can be difficult since the Advisor is trying to predict how much money that individual would have made over the course of his/her working career. There is no way to get this portion 100% correct. In the simplest form, the Advisor takes the amount of money the person is making today. The Advisor then subtracts any “Passive Income” the family may have (think rental property) that would continue with or without the Insured. Next the Advisor subtracts the annual income of the spouse. Finally the Advisor and Insured must choose a conservative rate of return that a lump sum of money could earn today. Let’s look at an example:
Peyton (our example insured) currently makes an annual salary of $50,000. The family owns a rental house that makes $5,000 a year after expenses (mortgage, insurance, repairs). Peyton’s spouse does not work outside of the house. Peyton and the Life Insurance Advisor believe a conservative interest rate that can be earned in today’s environment is 4%. Let’s look at our calculation!
$50,000 – $5,000 = $45,000
$45,000 / .04 (4%) = $1,125,000
Therefore, in order to replace Peyton’s Annual Income (less passive income) the family would need to place a lump sum in the amount of $1,125,000 into an account earning 4% a year. Please note that the calculation above does not take into account the draw down of principle!
As you can see, when calculating the amount of Life Insurance someone needs, there is a huge emphasis placed upon the insured’s annual income. What happens when the person does not earn income? This is the problem most advisors face when determining the amount of Life Insurance the Stay At Home Mom needs. I have researched this topic in depth, and as of right now, most “accepted” assumptions place the annual worth of the Stay At Home Mom somewhere between $35,000 and $45,000. Is this right? In all honesty I believe there are three answers to that question. The three answers are: Yes, No, and Maybe So! I know personally, that if I had to hire someone to replace everything my wife does for me, my annual bill would probably be more like $60,000.
Problem Two – Convincing The Family The Stay At Home Mom Needs Life Insurance
If we are able to agree on an actual dollar figure to place on everything the Stay At Home Mom does during the year, the next (and biggest) problem that must be dealt with is convincing both the Husband and Wife that the Stay At Home Mom NEEDS life insurance. You may be asking yourself, “Why must both the husband and wife be convinced that the loss of the Stay At Home Mom would cause financial hardship to the family?” I actually ask myself that same question! Stay At Home Moms, how mad would you be if someone said the job you do on a daily basis is not worth anything? How mad would you be if you heard someone say that since you do not contribute financially to the family, you are less important than your husband? By now, I would assume that you would probably be ready to rip someone’s head off. Well, in my dealings with young families, the WIFE makes the life insurance decisions about 75% of the time. Yet, atleast 90% of the time, the wives I have dealt with will decline to purchase any life insurance on themselves!
I understand that most families feel like they need to prioritize expenses like life insurance. I agree, to an extent! If you are a Stay At Home Mom, your main objective should be to take care of the life insurance needs of the “bread winner” first. As a Stay At Home Mom, you look out for the well being of the family unit on a daily basis. Why would you stop looking out for the family at such a crucial time? If you (the Stay At Home Mom) were to pass away today, would your husband be able to resume his day to day activities of providing an income for your family if you passed away tomorrow? Would your husband be able to maintain his current work schedule while at the same time getting the kids off to school? Would your husband be able to maintain his current work schedule and get the kids to soccer practice, swim practice, dance, or gymnastics? The laundry list of extra jobs your husband faces with your death could lead him to an eventual breakdown. If he breaks down, would his job performance suffer? If his job performance suffers, could he lose his job?
This is my call to action for all Stay At Home Moms! Your job is as important (in my opinion MORE IMPORTANT) as your spouse’s. It is time for you to take the credit you deserve and realize your true worth. You work tirelessly each and every day to make sure your family has all it deserves, doesn’t it make sense for you to leave your family in best shape possible when you are no longer here?