When Calculating Life Insurance You Are Replacing Two Incomes!

When Calculating Life Insurance You Are Replacing Two Incomes!

Purchasing life insurance is a bigger discussion than just replacing one income…sometimes you have to replace two!

Over the years I have watched a lot of my favorite personal finance bloggers talk about calculating life insurance need, and I never understood why their calculations only take into account replacing one income.  Two recent posts on the subject are:

You Need to Take into Account 2 Incomes when Calculating Life Insurance Need

I am married, but have no children (yet) if The Wife were to die tomorrow you better believe that I am not going to work, for a little while. What is that little while? I have no idea..but I am not just replacing her income, I have to partially replace mine.

Now throw some children who just lost one of their parents into the mix. You think you are going back to work on the following Monday? Month? Year? Who knows but that should be taken into account.

Everyone seems so worried about over insuring, but when discussing term insurance it is so cheap to do so, why gamble with your family’s future. Lets take PT’s Life (hope he doesn’t mind):

  • I decided on $500k because that would be enough to replace a good portion of my income. If I passed, my wife would still have to work (which she plans to do anyway), but the extra income would allow her to breath easy and not put our home, her retirement, or our kid’s education at risk.
  • $45/month for $500,000.

So after the Wife Pays off the mortgage so the house isn’t at risk, and putting X amount into the child’s 529 account how much is she really going to have? Two or Three years of PT’s income, maybe?  How quickly will she run through that if she decides not to work for 6 months so their child has stability in his or her life?

I should note that I have no idea what PT and his Wife discussed.  Maybe PT already has his child’s education mostly paid for and that should be taken out.  For instance, I am positive that if I were to die, my wife would sell our home and move in with or near her family substantially reducing our insurance need.

What would another Quarter of a Million dollars cost? Depending on the company, probably another $22 bucks/month.

Like most Personal Finance “Rules” I think one has to take a deep look into YOUR situation and determine what is right for you and your family, not what some random talking head on CNBC tells you.

10 Responses to When Calculating Life Insurance You Are Replacing Two Incomes!

  1. Nice point Evan! I didn't think about that grieving period so much…. I donno, I would think the average person would grieve for 3-6 months and go back to work no?

    So perhaps budget for one more year of income. I don't think you need to budget for 2 incomes.

    If I were to die, my life insurance proceeds could support me wife for 20 years until it runs out. But of course, she could easily sell the house, get rid of payments, extract equity and live a lot longer.

    Do you have a life insurance amount simply formula for us to follow based off income or assets?

  2. I have no clue about the avg grieving time, but I bet its longer if you have minor children. Give them stability – or just generally be there.

    I should prepare a full post about how I usually answer that question for financial planners in my office, but it is based off of living expenses, not income.

    If the family is spending $120K/yr – then we need to get them close to $120K/yr of income (in conjunction with their other assets). If we get push back that a spouse is going to absolutely go back to work, we will reduce the expenses after X amount of years.

    If they plan on paying off debt then the $120k/yr need would be reduced because expenses would be lowered.

    Hope this kind of helps.

  3. Thanks for sharing my post and calling me out. You make some good points. With my choice, I tried to strike a balance between a reasonable payment and providing some security. I'm not trying to make my wife a millionaire when I die. I just want her to be stable.

    Keep in mind that prior to getting this insurance, all I had was around $200k in life insurance through my company. So, the fact that I now have $500k on top of that puts me in a much better position. I say that to encourage any readers who don't have life insurance to take the step towards getting it. You'll be much better off than where you are now…even with a small policy.

    Now, to answer your criticism directly, I'll say this: you only need to factor in 2 incomes if you rely on those 2 incomes. We don't rely on 2 incomes. We save, give, and live off of my income. What she brings in is just icing on the cake, which we use for extra savings, fun, and whatever.

    If I die, my wife could pay off our home ($150K), provide some college assistance ($50k?), and still have over $300k to do whatever with.

    How is that not enough cusion for a fully capable person?

    Again, I'm not trying to make my wife a millionaire. Just provide some stability for a while. She's not going to get to sit on her ass for the rest of her life. :)

    Now what type of person couldn't provide for her family with a fully paid off house, car, college paritally funded, and more than $300k in the bank? Heck, you'd only need a part-time job to live very comfortablely. She could live off the residuals from my blog. But my wife is a teacher and so she will make a good salary, could work where our child goes to school, and also will get a nice chunk in retirement through the teacher retirement system.

    I agree with your main point in that you should factor in all of the income you require to live your current life. But if one is living close to the edge with 2 incomes maybe they're living too extravagantly. Maybe they need to learn to live on a smaller amount. Maybe that person is the one putting their family at risk??

  4. Wow Lots of Stuff here PT, so I'll just respond one by one:

    “Keep in mind that prior to getting this insurance, all I had was around $200k in life insurance through my company.” – I didn't know that, and that makes the number a little more understandable.

    “you only need to factor in 2 incomes if you rely on those 2 incomes. We don't rely on 2 incomes. We save, give, and live off of my income. What she brings in is just icing on the cake, which we use for extra savings, fun, and whatever.” – While I think your situation is bad ass and one to strive for, I doubt it is the norm. Are you saying, in a necessary 2 income family situation I am right? I don't think most people have a second income for just icing.

    “Now what type of person couldn't provide for her family with a fully paid off house, car, college paritally funded, and more than $300k in the bank? Heck, you'd only need a part-time job to live very comfortablely.” You are putting your spending values on others. If you were spending $100K GROSS you need to earn approximately $150K. With 300K in the bank and the wife working part time to make $50K – there is a short fall of 100K, so that 300K is going to be eaten into pretty quickly. This is unlikely your situation.

    But if one is living close to the edge with 2 incomes maybe they're living too extravagantly. Maybe they need to learn to live on a smaller amount. Maybe that person is the one putting their family at risk?? I live on Long Island (don't worry I don't have that annoying accent) – 2 incomes are the norm here, because housing, taxes and utlities dictate it to be. Could I move to a cheaper area to live? Probably but to say I was living extravagantly now would be wrong.

    In the end, I think we are agreeing that everyone's situation is different, which is why when anyone makes a decision as big as buying a product to take care of their family for the decades after death it should be a little more serious than, 10x earned income.

    While you took it seriously, I really believe most people don't.

  5. My father died when I was ten. My mother took off one-two weeks, perhaps, and maybe a little more time (afternoons here and there) to sort paperwork and such out. I really can't imagine why someone would need to take literally months off of work for bereaved children. Getting back to a routine as soon as possible is key for kids (even if said routine now included a few months of therapy with a children's counselor).

  6. Zella,

    I am sorry to hear about your loss at such a young age. I think we disagree as to what is proper for a child, but imagine for an extra $15/$20 or $30 bucks per month (it might have been more depending on your father's health) if your mom's new routine was not working and being there for you for those few months? or few years.

  7. It would have made things worse by stopping the routine– seeing my mother at home for months after would have been frightening, as she loves her career. Our family thrives on busy. As an aside, insurance proceeds went to immediate needs, savings, and such (there was a plan, just different from what yours might be).

    Additionally, we already had a great support network within our community and my parents had sound fiscal planning in place. There was no intended plan for anyone to stop working and remain out of the work force for an extended period, other than personal illness. That's the fiscal policy between my husband and myself as well– neither of us will leave the workforce for an extended period of time.

  8. I am no where near a psychologist or psychiatrist, but I can't imagine it being a good thing that life just moves forward after losing a parent at the tender age of 10.

    I am not a parent, but if I were I couldn't imagine not paying the extra 15 or 20 bucks so my wife could take off a longer period of time. A time until she felt it was right, not forced by economic strain because I saved a hundred bucks a year.

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