When Calculating Life Insurance Need, Answer this Question. Are You Replacing One Income or Two?
When calculating the need for life insurance, the conventional, “inside the box” thinking typically takes into account the need to replace just one income…the income that is lost by the primary income earner who is no longer there to make a financial contribution. But like so many things in life, the most simplistic, top-of-the-head way of thinking about a problem is not always the most useful.
Tragically, when the life of one parent in a young family is lost, a paycheck is only one part of what disappears into the enormous void that is suddenly created. The working partnership that existed between two parents role-playing is forever changed. The multifaceted roles that were performed by both spouses in running a family can hardly be filled by a single parent alone.
In so many cases today, the reality of the situation is that both spouse’s income earning potential is affected when one is lost. As a practical matter, when both parents work, many families will need to take into account two incomes when calculating life insurance need.
Thinking it over, the idea of “over insuring” seems far fetched especially when buying term insurance is so inexpensive.
Let’s take one example:
* The head of a household decides on $500-$600,000 in a term life insurance policy, for several reasons. First, the coverage needs to replace a good portion of the breadwinner’s lost income. With the main income earner removed, the spouse would very likely need to continue to work, or potentially to find a job.
There’s also the mortgage. After the surviving spouse pays off the mortgage and puts money into a child’s 529 account, how much will be left? How far will the income last if a widow or widower decides not to work for 6 months in order to provide their children with more stability?
When another quarter of a million dollars can cost as little as $22 dollars/month, the lifestyle implications are clear. Calculate the consequences of what will befall two incoems, not just one. In the final analysis, two incomes are what can be at stake.
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