Stay-At-Home Parents: Watch Out For These Two Things

April 16, 2012

With the twitter-sphere going crazy last week with the question as to whether a stay-at-home mom works or not, my thoughts naturally gravitated to the financial planning aspects of the situation. Stay-at-home parents may have it made when it comes to spending quality time with the children and not having to panic when the kids are sick since they are at home.  However, there are some unique challenges for the family that made the decision to have one parent choose the career of “parenthood.” 

With one income, there is generally less money to go around but with careful planning and budgeting, that obstacle can be mitigated or overcome.  A stay-at-home parent can often manage the household budget in a much more efficient manner because they have the time to put the needed attention to it.  I was amazed at the amount of money I was able to save by spending only two hours a week “couponing” – I easily saved 50% on our household items and could probably duplicate that with groceries if I had the time.

Some areas of vulnerability are not so easy to overcome.   They fall squarely in the area of protecting the income stream of the working spouse.  Since there is only one income, it needs to be protected from a catastrophic event.  Insurance is the answer since losing the income stream is virtually impossible for most families to overcome.  Here are some things to consider:

Make sure you have adequate insurance on both spouses:

When determining how much life insurance to get on the working spouse, many people simply take their annual income and multiply it by the number of years they’d like replacement. There is a component missing from this simple equation, however, and that is benefits.  Employers pay an average of 30% over and above an employee’s salary in benefits – the big ones include medical and retirement benefits.  So take into account that medical insurance for the entire family will need to come out of that life insurance benefit as well as the employer’s contribution to a retirement plan.  Pad your estimate to include having to pay for these benefits out-of-pocket.

Don’t forget life insurance on the stay-at-home parent.  Consider what core contributions would need to be replaced such as day care, which costs an average of over $11,000 per year per child nationally, and housekeeping, which I recently priced at over $300 per month.  When my kids were little, I did have a cleaning service bi-weekly because I just couldn’t do it all and needed help.  Determine how much you’d need to hire for the services needed to care for your family.

Review the working spouse’s disability policy: A 20 year old has a one in four chance of being disabled by the time they reach age 67 and I don’t know about you, but if I were having surgery and the doctor said I had a 75% chance of success (and a 25% chance of failure), I’d think twice about the surgery.  A family dependent on a single income can’t take the chance of a disability wiping out that income stream.  The good news is many employers provide group disability as an employee benefit.  You just need to determine if the coverage is comprehensive enough for you. Review your disability plan at work and look for the following things:

  • Definition of occupation – is the policy definition of disability “your own” occupation, a “reasonable” occupation or “any” occupation?  These are all quite different.  Your own occupation is the highest and best definition since if you can’t perform the duties of your own occupation, it will pay out.  Any occupation leaves a ton of grey area.
  • Benefit:  Many disability policies pay 60% of base income or salary, not including bonuses, so make sure yours pays at least that much.  You won’t find a much higher monthly benefit since insurance companies don’t want to make it an incentive to be disabled.
  • Benefit period:  Many group policies will pay benefits for a two year period.  They may also have a two year “own occupation” definition but after a set time period, such as two years, they will only pay benefits if you can’t do “any” occupation.  The best policy would pay a benefit until age 65.

Review the definitions and parameters of the policy to make sure they are adequate.  If they aren’t, look into a private disability policy from your insurance agent.  Since you own an individual policy, it is portable if you change employers and non-cancellable (if you choose that option).

One income families certainly have a challenge making ends meet and at the same time saving for long term financial goals.  Many families cut corners in order to make the monthly budget add up.  One area that should be fortified instead of cut is protecting that sole income stream for the household with insurance.  The saying “Don’t sweat the small stuff” applies here.  Sweat the big stuff when it comes to life insurance and disability.