What if You Aren’t Earning Income?
Many people incorrectly assume that they should only buy life insurance if they are earning income. However, if you are a stay-at-home mother, there is a significant tangible financial value to the contributions you are making. You provide daycare and child care, chauffeuring services, meal preparation, housecleaning and a whole host of other tasks that you would have to pay someone to do if you were no longer able to do them.
As such, if you are a stay-at-home mother, the cost of replacing the care that you provide to your family should be calculated and used as your “salary” for the purposes of determining life insurance.
What if No One Is Depending On Your Income?
If no one is depending upon your income now, and no one will be in the future, then you likely do not need life insurance. However, before you decline coverage, think about anyone who might possibly suffer a financial loss upon your death including siblings or aging parents. Think too about how your circumstances might change in the future, as it is cheaper to buy a policy when you are younger.
Life insurance is purchased to protect your beneficiaries in the event of your death. When you buy life insurance, the policy pays out to those you designate so that their financial stability is not affected by your death. As such, deciding how much life insurance to purchase is extremely important as you want to make sure your family is protected without incurring extra policy premiums by buying a policy that is too large.
Calculating How Much Life Insurance You Need
There are many different formulas and shortcuts that people use when buying life insurance to try to decide how much coverage to buy. As a shortcut, some people suggest buying a policy equal to 10 times your income. This would mean if you made $60,000 a year, for example, you would buy a $600,000 policy. However, this is a relatively inexact calculation.
If you want to get more specific and make a decision that works for your financial situation, think about the purpose of buying life insurance: to allow those who depend upon your salary to continue living as they would if you were still alive. To decide on how large of a policy to buy, therefore, it is a good rule of thumb to consider how much money you need to have invested in order for the return on the investment to generate enough to equal your salary. For instance, if you needed to make $60,000 a year from your investments to replace your $60,000 per year salary, how much would you need to have invested?
To do this calculation, you will need to determine how much you can reasonable expect your investment to make. If you consider a 6 percent return on the money invested, for example, you would need to have $1 million dollar policy to generate $60,000 per year. You should, therefore, purchase a policy that covers you for $1,060,000 (to include the first $60,000 as well for the year immediately following your death). You also may want a slightly larger policy in order to account for inflation.
In addition to income replacement, you may also wish to have your policy pay off all of your debts as well as future obligations you might incur. For instance, if you had a $300,000 mortgage, you could add that $300,000 to the amount of your policy for a $1,360,000 policy. You could also add in the cost of college tuition for your kids or any other large future expenses to arrive at the total amount of coverage to purchase to leave your family in the best position possible.
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