Life Insurance for the at home parents

By Tim Dameron-business columnist/Rocky Mount Telegram



If you belong to one of the 19.6 million American families with children where both parents are working, buying life insurance for both breadwinners is an obvious "must."

However, if you are one of the 5.3 million families that rely on one-income while the other parent stays at home, life insurance for the at-home parent may seem less important. Contrary to popular belief, life insurance for the at-home parent also is extremely important.

According to the Personal Economy Index, a recent survey conducted on behalf of American Express Financial Advisors, 35 percent of at-home parents are uninsured.

Value of the at-home parent.

The at-home parent provides a valuable service to the family. In fact, if a stay-at-home parent was on a corporate payroll, the starting salary could be $65,000 per year, according to the U.S. Census Bureau. This "value" comes from factoring in the cost of replacing the at-home parent with a full-time child care worker, cook and so on. The untimely death of a stay-at-home parent would not only be heartbreaking and tragic, but could drastically affect a family's immediate finances and long-term financial security as well.

Benefits of insuring the at-home parent.

A client from Texas, who is an electrical engineer, was advised by his American Express financial advisor to take out a life insurance policy for his wife who home-schooled five of their six children. Tragically, his wife died from complications just days after giving birth to their seventh child.

His life insurance policy gave him the financial security to leave his job to care for his family. Additionally, he was able to spare his children from further lifestyle changes such as moving or forcing them to quit their numerous sporting activities. With the money from the life insurance policy, he was able to take over for his wife's home schooling, and he didn't have to hire a child care worker or housekeeper, all of which made the transition just a bit easier for his kids.

Insuring the at-home parent.

When considering purchasing life insurance, for yourself or the stay-at-home parent, there are two questions you need to ask yourself: What type of insurance should I purchase? How much coverage do I need?

Generally, there are two types of life insurance policies: A term-life insurance policy, which provides protection for a specified term and pays a death benefit to the beneficiary should the owner of the policy die during the term. A cash value insurance policy provides the owner with a death benefit, plus any cash value earned from investments.

Generally, non-income producing parents tend to like the cash value policies, because these policies allow for them to accumulate assets despite the fact that they are not working. Term life insurance policies may be appropriate for some, since they are usually relatively less expensive in the short term.

Deciding how much life insurance you need is unique to each family and circumstances. As a starting point, consider having at least enough coverage to equal five to seven years of income. So if the stay-at-home parents' value is estimated at $65,000 per year, you may need a life insurance policy with coverage of $325,000 to $455,000. This formula can be applied to the working parent as well.

Generally speaking, you should follow these other helpful tips:

Overlooked expenses: You have to account for the less obvious costs of losing a stay-at-home parent. For example, the working parent may need to take an extended vacation or leave of absence to be at home in the case of such a tragedy. In addition, the family may eat out more often and incur other new expenses based on the new lifestyle with one parent. Don't forget to account for inflation and the expected increase in these expenses over time.

Account for lost savings: With extra expenses or lost wages, you may be forced to dip into your emergency cash reserves or reduce contributions to your 401(k).

Number of dependents and duration: When calculating how much insurance you need, estimate the length of time your dependents might need the benefits. This will depend on how old your kids are and how many you have.

Seek help: Consider meeting with a qualified financial advisor who can help you and your family develop a comprehensive financial plan. This plan will include adequate life insurance coverage for both parents, the one who works outside the home and the one who provides the valuable, albeit unsalaried, services in the home.

Tim Dameron is a financial advisor with American Express Financial Advisors Inc. in Rocky Mount.