When calculating life insurance for families, where the insured has an income, the general solution is to insure a multiple of the income being earned. It’s a straightforward ‘insure the loss’ situation, where the loss is the annual income of the spouse who passed prematurely.
With a stay at home parent, we no longer have a direct ‘loss of income’ that we can insure with life insurance. So instead we need to determine and place a value on the contributions to the family’s lifestyle provided by the stay at home parent. So while we don’t lose a specific dollar amount, we do lose their contributions. Those contributions to the lifestyle would need to be replaced – and that we CAN place a value on, though only through estimates.
One way we would estimate this would be the replacement cost of childcare and household maintenance duties. If we estimate the cost of this at roughly $20-$25K/year (you’re welcome to use your own estimate for this) then the correct amount of coverage is 10-15 times this. This places us in a range of $250,000-$500,000 of life insurance coverage. Therefore we would suggest selecting either $250,000, or $500,000 as the amount of coverage on stay at home parents. There’s no ‘correct’ answer to how much life insurance a stay at home mom or dad needs, so however you feel about these two amounts of coverage is the correct amount for you.
The second way to estimate this is to look at the income earning spouse who would generally have 10-15 times their gross income. From there, your personal objection to the first calculation may be that you feel that it places a higher value on the life of the income earning spouse. This is incorrect because we’re not valuing their life, but instead their income which is lost in the event of their death. Nevertheless, it’s a not uncommon choice. If that’s your preference, then the correct amount of coverage for the stay at home mother or father is the same amount of coverage as the income earning spouse.
So there’s two ways to calculate it – either pick between $250,000 or $500,000 of life insurance, or choose the same amount of life insurance coverage as your spouse.