Life insurance policies are often touted as a good way to protect families after the loss of an income earner. But what about the stay-at-home spouses whose key contributions to the family don't come in the form of a paycheck? (For a primer on life insurance, see Everything You Need to Know Before Choosing a Life Insurance Policy.)
In this article, we'll look at why it's a good idea to buy life insurance for spouses who don't bring in an income.
Stay-at-Home Labor: The Invisible Economy
First, we have to consider the important ways stay-at-home spouses contribute to the household economy.
The figures vary, but most studies estimate that stay-at-home parents do about 90 to 100 hours of unpaid work each work (and that's an average, meaning that some do even more).
It's hard to put a monetary value on that kind of work, especially since it will depend where you live (the cost of living – and of everything – will be higher in downtown Manhattan than it would be in a rural community). But whatever the figure, it's bound to be huge.
Just think about it. If the stay-at-home spouse weren't in the picture, what would it cost to make up for everything they do? Just adding up the obvious stuff you'd have to outsource, like childcare, laundry service, and meal preparation, and you're already looking at one hefty bill.
Even if the family's primary earner wouldn't have to hire someone to take on the extra work, there's a good chance they would need to reduce their working hours to take care of the countless, often overlooked things the stay-at-home spouse handles.
If this seems like more than the primary earner could easily handle, then a life insurance policy for the stay-at-home spouse is worth considering. It can be a good way to defray some of the costs that come with taking on this extra workload.
Funeral and Other Final Expenses
Even if earnings were not severely affected by the loss of a spouse, there are still a lot of large, one-time expenses associated with it.
Funeral, burial, and other related costs can add up. A simple cremation can run close to $5,000, while a more traditional funeral and burial can come up to $10,000 or more.
Legal fees might be involved when dealing with the will and the distribution of assets, and estate taxes might have to be paid as well. There may also be outstanding bills for end-of-life medical care that still need to be taken care of.
The surviving spouse is also likely to take some time off work, but is not likely to earn their full salary while doing so.
A modest life insurance policy might be a good idea simply to pay for these one-time costs.
Policies Are Probably More Affordable than You Think
You might assume that purchasing a life insurance policy for both spouses will cost about double the amount of purchasing a single life insurance policy for the family's primary earner (adjusting slightly for age, health, and occupation).
It will, but only if you purchase two separate policies.
Married couples can take advantage of savings by buying joint life insurance. This provides the same amount of coverage but usually at a lower rate.
First-to-Die Life Insurance
First-to-die life insurance is permanent or term life insurance that pays on the death of the first spouse. The coverage amount will be the same no matter which spouse dies.
Once the payment is made, the policy ends. If the surviving spouse wishes to purchase life insurance after the death benefit has been paid, they must apply for another policy (unless a clause in the first-to-die policy guarantees that the joint policy will convert into an individual one).
Savings for this kind of joint policy can be considerable. Couples can save 20% or more compared to the cost of purchasing two separate policies.
Given the high divorce rate in America, it's important to consider this possibility before purchasing a first-to-die policy. You should insist on a divorce clause for the policy. This clause allows the spouses to convert the joint policy to two individual policies should they divorce. If an insurer refuses to do this, I recommend moving on to another company.
Survivorship Life Insurance
Survivorship policies give second-to-die coverage, meaning they only pay a death benefit once both spouses die.
Since these policies offer no financial relief when the first spouse dies, they are primarily purchased by wealthy couples who want to ensure that their heirs are able to pay taxes on a large estate (find out How Life Insurance Can Affect Your Taxes).
Survivorship policies are significantly cheaper than buying separate policies.
How Much Life Insurance Does a Stay-at-Home Spouse Need?
A good rule of thumb for deciding how much insurance you need is to add up how much debt you have (including your mortgage) and how much you think it will cost to put your children through four years of college.
A rock-bottom minimum regardless of your debt is likely to be $100,000. For most families, $1 million might well be called for.
Note that if you die your spouse might be responsible for debts incurred in your name (laws about this vary from state to state).
Whole Life Versus Term Insurance
Whole life (or permanent) insurance bundles investments with your life insurance coverage. It's seen as a poor investment vehicle by many financial advisors, but it does provide life-long coverage (learn more in Insurance as an Investment? It's Called Permanent Insurance).
Term insurance is good only for a specified period of time. Because of that, it's more affordable and is often seen as a desirable option for those who might not need life insurance once the children are out of the house and the mortgage has been paid off.
What Are Your Other Options?
If you decide not to buy life insurance for a stay-at-home spouse, you should at a minimum purchase burial insurance. It provides limited coverage, but it's inexpensive and can help defray final expenses (see A Look at Burial Insurance to find out more).
It's also a good idea to take the money you would spend on life insurance and use it for long-term investments and savings. That way, the surviving spouse has a financial cushion to rely on while dealing with their loss.