Over the last couple of shows on MomsMakingaMillion, we have been discussing ways to close the investment gap that women have with men. On this Friday’s show (06.04.10), we are going to look at another gap that has persisted to exist even as women have become more financially savvy and have generated an increasing amount of wealth for their households.
In a two-person household, the life insurance policy that covers the man is often larger than the policy that the woman has – if the woman has a policy at all.
In spite of all of the financial strides women have made over the years, I thought that this seemed odd. If you think about it, life insurance is not something any of us really want to talk about. Although it provides a financial safety net for the ones we love, it also represents an end-of-life scenario that we don’t find particularly appealing.
Not only that, when men and women do purchase policies, it is often the man who has the larger of the two. But that’s not the way it should be.
I’m not quite sure why, but men have this protect-the-cave attitude when it comes to insurance while women are more about protecting who is in the cave. The insurance policies that men purchase often are large enough to cover the mortgage, the college education of their children and about 10 years of living expenses for their wife. And many men feel perfectly comfortable with this scenario.
The problem is this discounts the net worth of the woman in the house. There are however a couple of caveats before we move on. First, insurance is a necessary part of a financial plan; second, we don’t like to buy it; and third, we never know whether it will be enough.
When it comes to buying insurance which might be one of the last throwbacks to an era when the man was the head of the household, you need to consider a couple of things other than the obvious life insurance rates. If a women lost her husband’s income, the thinking went, you would become homeless, your kids would be denied all of the opportunities they might have had had Dad lived and you would be a penniless widow forced to go to work to make ends meet. So men got the larger policy, sometimes ten times as large based on the 10-year format.
But if you think about it, the loss of a stay-at-home mom would be more of a financial disruption than we might consider. Not only would the loss be devastating, the cost of childcare would present some huge financial hurdles for the newly widowed dad which would impact his job, the future of the kid’s education and a whole host of financial securities that mom brings to the table.
And let’s not forget that mom also brings home a paycheck. In this day and age, any permanent loss of income can create a financial hurdle that would be difficult to overcome. Most stay-at-home moms aren’t stay-at-home forever. They eventually go back to work. So not only is the lost income a factor, childcare costs play a role in the need for insurance.
But the question always reverts back to: how much is enough?
We can buy more than we need if we buy it when we are young. And despite what the agent will offer, which will include policies that do some investing, creating a cash balance that eventually pays the premiums, stick with term life insurance. It’s cheap and you can buy a lot of coverage for the exact period of time you need it. Twenty-years is typical.
While not all states offer a level payment option for this policy – in other words, one payment for 20 years – most do. In insurance lingo, they will refer to this as a temporary policy. This is good for families that have mortgages, outstanding student loans or who have a small business. It should be able to cover the loss of income for a ten-year period, minimum. A policy of about $500,000 should be adequate to cover a family with a $250,000 mortgage, college costs of about $100,000 and the income of the surviving spouse at around $50,000. For a woman aged 25, this type of policy would cost between $200 and $500 a year.
(It is assumed that the surviving spouse would not pay off the mortgage with a lump sum payment but rather made mortgage payments, that college would be something that would be saved for and that the income provided, averaged over those ten-years is only adequate. A $500,000 policy will not make the surviving spouse rich, just comfortable enough to keep their financial footing.)
If you are a smoker, double that premium. If you wait until you are 45, you would also pay twice as much as you would if had you bought the policy at 25.
Keep in mind, term life insurance is only needed when you have few assets and lots of liabilities (kids, mortgages, loans, college) and is not really all that important once you have built a good financial footing. But women should be insured on equal footing as men. Not only does it cost less but it provides even more peace of mind than you might imagine. And the simplest policy is really all you need.
Related posts: