Previously, we heard about retirement savings for Stay-at-Home-Moms (SAHM). This week, I interviewed Aaron Pinkston, who created Clarifinancial to make getting life insurance quotes better and easier. He’s done all kinds of fancy life insurance things, but he eventually learned that no single insurance agent has the best solution for everybody. That’s why you need custom life insurance quotes from multiple agents. Clarifinancial doesn’t sell insurance. It just lets you get anonymous quotes from agents before deciding which one you want to contact.
Does a SAHM need a life insurance policy? How do you determine how much?
The purpose of life insurance before retirement is to replace the value of those who depend on you. Traditionally, some people thought of that value as replacing money made by the income earner. But I think it’s pretty safe to say there is a lot of value people provide their loved ones besides just an income. My own mom was a stay-at-home mom and she did a lot every day–things like transportation, shopping and meal preparation, tutoring, bookkeeping and accounting, cleaning, and more. She really was a personal assistant to all four of us guys on top of having her own life.
The amount of life insurance that is appropriate really comes down to a personal choice. Talk with your spouse or partner about this and figure it out together. Because the types of things stay-at-home moms and dads do tends to follow the same type of income curve of a bread-winner, a good starting place for that discussion might be 1 – 2/3 times the same amount of life insurance the income earner has.
But seriously, write every thing down and price it out if you have to – it’s that important. If you still get stuck, a fee-only financial planner can help you work this out for comparatively cheap on an hourly rate.
How much life insurance should the working husband have? (replace the income, live off the interest?)
Again, there’s no hard and fast rule to this. I think it’s best to get a few perspectives and start a conversation. There are plenty of calculators online, like on Yahoo! Finance. To get another reference point, many financial planners use a similar formula. First get a hold of these facts:
- The amount of income you need to replace. (i)
- The interest rate the beneficiary (but not the insured) is comfortable managing the money. (r)
- The liquid assets you have or could sell (not your house because you need to live in it). (a)
The formula is (i/r) – a = life insurance amount
So if you need to replace $50,000 of income and you are comfortable managing the money at a consistent 5% rate of return and you have $150,000 in accounts or other sellable property, you need: ($50,000 / .05) – $150,000 = $850,000
The great thing about this formula is that it already takes into account your risk tolerance and the assets you have on hand. There are other things to take into consideration though, so this is just a starting point for a conversation. For more on that and a different example, see How Much Life Insurance Do You Need?
What’s the difference between term vs. whole life insurance?
I actually think this is one of the *last* questions you should ask yourself. Instead, it’s often the first because the insurance industry has set up constructs to make us think along these lines. Don’t the life insurance industry define how you think about your family’s protection. Figure out your needs first and then go shopping. As long as you stay true to your needs, you will get what you are looking for.
Once you know why you need life insurance, you should have a good idea of how long that will last and how it may change in the future. If you need your life insurance to last your entire life or to act as a savings plan, then you need some type of permanent life insurance. But most people are just worried about the death benefit, the amount they pay, and how long it lasts. If that’s you, ignore this question until the very last. You’d be surprised how much less confusing buying life insurance is if you don’t pay attention to things that aren’t critical to your goals.
I go into a bit more detail about why, including an off-beat metaphor in Term or Whole Life: Which is Right for You?
