Even though most of us hope we never have to collect on life insurance, it makes a ton of sense for nearly all single income families. Often times, one parent will stop working after the birth of a child and if they don’t return back to work you now have a single income family. Since most people have kids around their late 20’s or early 30’s, this can really cut into your prime earning potential.
So that’s why most people end up getting life insurance for the income earner in the family. Should something happen to that person, the family would receive X amount of dollars in income protection in order for them to live comfortably for the rest of their life or a very long period of time. Most employers even offer life insurance as a standard benefit, although the award is generally only 1-4 x your salary and not nearly enough for your family to live on forever.
Benefits of a Stay at Home Parent
I babysat my 5 year old sister for 2 days a couple months ago and let me tell you, it was no vacation! She was full of energy and in constant need of entertainment. I ran her around like I would a puppy, but she still wouldn’t take a nap. Finally, I gave up and let her watch youtube cartoons on my iPad. This experience definitely made me think twice about being a stay at home dad but I still think the financial benefits can make up for the stress.
Most people tend to trivialize the work of a stay at home parent because they don’t have first hand experience dealing with it. But regardless of how difficult you think being a stay at home parent is or isn’t, there are still certain financial benefits that staying at home can present. These benefits are especially pronounced when you have a large income disparity. Here’s an example:
Jane the doctor makes $250,000 a year while her husband Eric makes only $75,000. Let’s say they have a child and they both decide to work and hire a nanny/daycare at $1,500 a month(the average US daycare rate is $1,000 a month) or $18,000 a year. Since money is fungible, Jane’s income would fill up the tax brackets first and Eric’s income would come in at the highest marginal brackets(federal – 33%, state(CA) – 9.3%). So Eric is actually paying 42.3%(plus SS/Disability tax) tax on every dollar he makes. So after tax, he is only making $43,275.
Let’s say Eric decides to stay at home and watch the kid, now they’re losing $43,275 in after tax income but saving $18,000 a year in daycare expenses. So the actual loss in income is only $25,275.
I know I’d be pretty depressed working a job where I only kept 33 cents of every dollar I made so if I was Eric, I’d vote to stay at home. Even though there’s still lost income($25,275 a year), in my opinion, it pales in comparison to the benefit you would get from staying at home with your kid(s), taking care of them and watching them grow. In this case, there’s a huge benefit to being a stay at home parent since you get to take care of your children and do other things around the house without losing much income.
Hidden Benefits of a Stay at Home Parent
I think it makes sense to get life insurance for both parties regardless of income since each is contributing to the family in different ways. Obviously the income earner will be contributing with their income but there are so many little things that a stay at home parent does that can’t be easily replaced. Most families make life insurance a priority for the income earner and although the effect might not be as pronounced with a stay at home parent, the loss of the latter would definitely cause financial strain at a time when that should be the last thing on your mind.
Readers, what type of family are you: single income earner or dual income earners? What type of life insurance do you have? Personally, I don’t have any kids and I have saved up a large nest egg so I don’t think life insurance is necessary for me right now(although my work does offer some life insurance based on my salary and length of employment).
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I would stay at home. You only deduced day care but they may need a second car, suits and work gear, money for work lunches, convenience food at night because they are both tired, etc. Pretty sure they can optimize the budget and save the $25K effortlessly. Now for the energy required to be a stay at home parent, that is another story!
Yea that’s true, I made my analysis as conservative as possible and I think it still makes financial sense for one person to stay at home in this scenario. It gets a lot trickier though when both spouses make nearly the same amount of money.
I work and my wife stays home with our son. We have term life on both of us, and honestly with the cost of day care we have almost as much insurance on her as on me. Staying at home has big monetary value that would be difficult to replace without life insurance. It’s a big hole in your financial security if you don’t have a plan for how you would deal with that.
Thanks Matt, I completely agree! Just because you’re not making any money doesn’t mean it wouldn’t cost you a ton to replace what the stay at home parent does.