Myths and Mistakes Part 3

From Insurance for Dummies by Jack Hungelmann

Mistake: Covering only one income

Covering only one income in a marriage is a serious mistake. If your household has two incomes and you depend on both of them, don’t just cover one income (unless you have a crystal ball). One income may be larger than the other, but if the person with the lesser income dies and the surviving spouse can’t make it on his or her income alone, you have a problem.

When buying life insurance in a marriage, always insure both incomes unless the person with the larger income brings home enough pay to completely support himself or herself and the second income is just gravy.

Mistake: Ignoring a homemaker’s value

If one spouse stays home with the children and takes care of the home (cleaning, doing the shopping, and so on), that person has a real economic value to the household because a lot of those services would have to be hired out in the event of death. Many couples overlook insuring the homemaker because no outside income is being brought in. Big mistake.

Buy life insurance on a homemaker. Estimate the amount of coverage you need by determining the cost to hire someone to perform the same tasks that the homemaker does. Multiply that by the number of years you need help, and then add in money for an emergency fund, college fund, and so on. (Also consider funds for longer vacations and shortened workdays for the surviving spouse.)

Mistake: Covering the children in lieu of the parents

When Johnny or Susie is born, you try to be a responsible parent. You’re deluged with a lot of solicitations about life insurance because of the birth announcement in the newspaper. You have hopes and dreams for your children, so you buy a nice cash value policy on your baby. It’s understandable — you’re so proud. But the economic effect on the family of a child’s death is minimal compared to the major impact that one of the baby’s parents dying would have.

When a child is born, seriously reevaluate and raise the amount of life insurance coverage that Mom and Dad have.