When looking at life insurance coverage needs, we generally look at income to determine the amount and the type. That’s because it’s often one’s income that determines your family’s lifestyle (which we’re trying to maintain in the event of death). But without a specific income, as is the case with a stay at home mother or father, how do we determine the proper amount and type of life insurance?
There’s two ways we can approach this.
The first way is to determine an approximate cost to replace the ‘value’ that the stay at home parent provides. So while that parent may not be generating income, they’re providing things like parenting children. Upon the parent’s premature death, what’s the cost of childcare? Household functions they were doing? Etc.
Generally the best we can do here (and it’s sufficient, since we’re working with estimates anyway) is to determine an annual amount that would provide housecare and childcare services. Often amounts of $25,000 to $50,000 are assumed, but you should choose whatever you feel is best. Once you’ve determined your assumption for that number, you can then treat is as income that needs to be replaced. And then you can use our How Much Life Insurance Do I Need? calculator to determine how much life insurance you need.
Commonly, people will choose $500,000 of term life insurance for stay at home parents. Keep in mind this is what other people choose, based on their assumptions and that does not need to be the amount of life insurance that you choose.
The second approach some Canadians take, is to start by using our how much life insurance do I need’ calculator for the income earning spouse. That will provide an estimate of how much life insurance they should have.
At that point, you then assume that the financial value of both spouses are the same. Therefore the stay at home parent would choose the same amount of coverage as was calculated for the income earning spouse. This is a choice some Canadians make when they find it objectionable that their life insurance is valued differently than their spouse’s coverage.
This approach isn’t entirely number crunching but it is valid. While we try to mostly stick to numbers and hard facts with life insurance, there is always a personal preference and individual assumptions that you should consider (once you properly understand the product). And this choice is an example of individual assumptions.
So there are the two common ways to determine how much life insurance at stay at home parent needs – 1) determine replacement value and use that as income in our how much life insurance do I need calculator or 2) assume that both spouses need the same amount of coverage, and therefore the stay at home parent chooses the same coverage as the income earning spouse.