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The following is a post by MPFJ staff writer, Kevin Mercadante, who is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.
We normally think of life insurance as a means to replace lost wages. For that reason, the largest amount of life insurance taken out on a family member will typically be on the life of the highest wager. There may be a $500,000 policy on the primary wage earner, and lesser amounts on other members of the household.
Life insurance coverage may drop dramatically for a homemaker. It's often assumed that since the homemaker has no income to replace, that far less insurance is needed. While a homemaker may not need as much life insurance as the primary wage earner, the need can be much higher than you think.
Should the homemaker die, a number of large expenses will be set motion. This will be especially true if there are children to be cared for.
For final expensesThe most obvious cost that will need to be covered is final expenses. This is a figure that can be easily estimated in advance, and usually falls somewhere between $10,000 and $20,000. That's a modest amount as life insurance goes, but it's only the beginning.
Unpaid medical billsThe cost of health care is exploding, and it's not too hard to imagine treatment in the terminal phase of life running into several hundred thousand dollars. If only 10% or 20% of that amount is uncovered by your health insurance for whatever reason, you could be looking at a medical liability in excess of $100,000, in addition to final arrangements.
That's the kind of liability that can cripple a family financially and would come on the heels of the loss of the homemaker. This factor alone makes a strong case for keeping a life insurance policy on the homemaker at least in the low six figure range.
ChildcareThis could be the largest potential liability for the surviving family, especially if they are very young children involved.
Depending upon where you live, the cost of getting full-time childcare for just two children can range anywhere between $1,000 a month and well over $2,000 a month. Taking the midpoint ($1,500 per month), that’s $18,000 per year.
If you have two children, say ages four and two, you'll probably need full-time childcare for at least eight years. It childcare will cost $18,000 per year, you'll need at least $144,000 to cover the cost for the full eight years.
Even if your children are a little bit older, let's say 12 and 10, they'll probably at least need someone to look in on them in case of emergencies. That won’t cost nearly as much as full-time childcare for younger children, but it is still an expense that will need to be considered.
Paying others to do the jobs the homemaker doesBeing a single parent is a tough job. It's even harder when you also work full-time. If the homemaker should die, dozens of jobs will need to be done around the home that the primary wage earner will not have time for. Some of these jobs will have to be done by others, that will mean still more expenses.
A cleaning service may need to be used to clean house. Someone may also have to be paid to do the grocery shopping. If the primary wager has a particularly busy work schedule, and the children are very young, a laundry service may be needed as well.
All of these services will need to be paid for, and they can add several thousand dollars per year to the household budget. That can make a strong case for adding another $50,000-$100,000 to the homemaker's life insurance policy.
In order to make adequate provision for the death of a homemaker, a life insurance policy of at least $350,000-$400,000 would be necessary. That gets very close to the $500,000 that might be used to ensure the life of the primary wage earner.
Life insurance for a primary wage earner is mostly about replacing lost wages. Life insurance for a homemaker is mostly about covering expenses that will develop as a result of the loss of the homemaker. This can be just as high as the need to replace income.
If you or your spouse is a homemaker, review your life insurance policy to make sure your family has adequate protection.
How about you all? Do you think a stay-at-home parent should have life insurance? Why or why not?
Share your experiences by commenting below!