By Barbara Marquand
Buying life insurance is a no-brainer if your spouse and kids depend on your paycheck to make ends meet.
What might not be so obvious is a need for life insurance if you're a stay-at-home parent. Even if you don't earn an income, coverage on your life is a good idea while the kids grow up.
No amount of money can replace a parent. But the cold hard fact is that the surviving spouse and kids would suffer a financial loss as well as an emotional one if a stay-at-home mom or dad died prematurely. Besides the cost of a funeral, the other parent likely would have to pay to replace some of the services the spouse provided, such as child care. That could be a devastating financial hit to a family.
The yearly average cost of child care for two kids ranges from $7,647 for home-based child care in Mississippi to $29,843 for center-based care in Massachusetts, according to a 2015 report by Child Care Aware of America, an advocacy group for affordable, high-quality child care.
The life insurance payout on a stay-at-home mom or dad who died could provide the money to pay for services. It could also give the family some breathing room to grieve. A surviving spouse might want to take time off work to be with the kids for a while, for instance.
Type of life insurance to buy
Term life insurance provides coverage for a certain number of years. If the person who is covered on the policy dies during the term, the policy pays money to the beneficiary. When the coverage is for financially protecting a spouse and kids, the other parent is typically the beneficiary.
Term life is sufficient for most families. It's cheap, and you can buy a long enough term to cover you while the kids are growing up and you're saving for retirement. By the time the term ends, ideally you have enough in savings to handle a crisis, and the kids are financially independent.
Permanent life insurance, such as universal or whole life insurance, provides lifelong coverage. Those policies also feature an investment component called cash value, which grows tax-deferred. Permanent life insurance is more complex and expensive than term life. It's not necessary if you need life insurance to cover you only during those financially vulnerable years of raising a family.
How much life insurance to buy
The amount of insurance to buy depends on what you want the policy to pay for. For a stay-at-home parent, that might include:
- The cost of child care and other services, such as cleaning or lawn care, multiplied by the number of years the family would need them.
- Extra money to enable the surviving parent to take extended time off.
- Funeral expenses. The median cost of a funeral is about7,200 with viewing and burial, according to the National Funeral Directors Association.
When you buy term life insurance, you choose the length of the term, such as five, 10, 15, 20 or 30 years. The term should cover the period when the death would harm the family financially.
Having life insurance is a responsible step for both parents to take to ensure a safety net for the family in case one of them dies.
Barbara Marquand is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org. Twitter: @barbaramarquand.