How much insurance does a non-working spouse need?
Let’s begin this discussion with a small story.
There was a family of four. Anand, a small businessman, his wife Asha and two kids Nitu and Vishal. Anand was 39 years old. He lived a good life. He ran a small business that provided him with a very good income and allowed him to devote reasonable time with his family. Then, tragedy struck. Asha’s life was taken away by a drunk driver. Anand’s life and the lives of his children were turned upside down. Anand had to deal with the loss of his bride of 15 years; the one person that meant more to him than anyone else in the world. His children had to deal with the loss of their mother.
Anand was a great father. However, he made a terrible mother. Anand’s wife was home every day when the kids came home. Anand was running a business and couldn’t be home by 4 pm when the kids arrived home from school. It wasn’t long before Anand began to realize that the children needed him to be there more often. Without parental supervision, they made poor choices, and they began getting into trouble around the neighborhood. Psychologists explained the children’s behavior as quite normal when faced with the loss of a parent. He was faced with a very difficult decision; the way he saw it, he had three choices.
- Keep working and run the risk of his children getting into things they shouldn’t be. Anand had always worked and figured he needed to provide financially for his children.
- Stop working to be there for his children. The only problem, albeit a very large one, was that this solution left his family with no income.
- The third solution seemed to provide the best of both worlds: he could run his business out of his home. Unfortunately, he quickly found that this wasn’t the perfect solution either. It was difficult for him to run his business full-time and focus full-time on his troubled kids. Changing the location of where he did his business didn’t make any difference.
His decision was finally made clear after he checked his eldest daughter into a rehab center: He HAD to stay home and fully focus on his grieving children.
The psychological damage that is created when a child loses a parent is huge. We cannot even imagine the affects. However, it has been observed that the mother’s death is often more devastating to the family unit. There are several reasons for this. Two of the main ones being that, not only are mothers often the relational nurturer, but they are often the ones that run the household and keep everything in order. This is true even in households where both parents work outside of the home. In general, if a man were to try and combine running and organizing a household with working; it just doesn’t end well.According to studies, a man’s brain is incapable of multi-tasking; his left and right sides of his brain literally do not connect. Combine this with the fragility of grieving children and you can see why Anand made the choice he did.
Even though home makers don’t earn money and if they aren’t around, there is no large financial impact. But in Anand’s case, as he was not prepared he had to use up most of his savings since he was not able to work and earn.Three years of living expenses wreaked havoc on his finances. It took him three years to feel comfortable enough to go back into business. Anand seems to be one of the few people that had enough money saved to last him three years. Even though after three years things are quite on track for his family, the financial and emotional impact has been quite devastating.
Hence from a financial planning point of view, it is very important that couples carry a minimal amount of insurance on the non-working spouse; just enough to cover the cost of funeral expenses, daycare/full time nanny/baby sitter, cleaning service, cook, etc. This is, if the spouse is a non earning member of the family. Else the insurance analysis based on Human Life Value or Income Replacement or Expenses incurred method should be followed.
The financial value attributed to a housewife is usually underestimated. Even if she is not contributing any income to the household, the opportunity cost of her absence in managing the house and children, is quite high!
For example, if 3.5 lakh per annum is the estimated annual value of a mother’s services, assuming a nominal rate of return of 8% over a 10-year period, the value of her services would be 50 lakh. This is the estimated amount of cover that this particular woman should take. In the unfortunate event of her demise, the insured amount can be invested to generate money for the household.
Another way of estimating a non-working spouse’s insurance needs is to consider the changed household circumstances in the event of her death. Her husband may have to look for a job that will allow him to play a bigger role in family matters. This is likely to imply a lower salary compared with what he was earning earlier.
If the insurance amount is invested, it should be sufficient to bridge this estimated loss of income. So, one should look at a term insurance for this amount. It will offer a low-cost protection to her family in case of her untimely demise.
Now coming to the other side of this topic- THE FATHER. What if a father is non working, his wife runs the show and he prefers staying at home to take care of kids. What will be the impact if he is not around one fine day(unfortunately)? According to studies, it is going to have almost the same impact in organizing and maintaining a family apart from the emotional disturbances. This is because this father would dedicate his heart and soul for taking care of his kids, taking the place of the mother. Of course no one else can take their place literally, but having financial back up can make things better and quicker. Raising money all of a sudden is no child’s play after all.
Varsha Gaikwad – Para Planner Advisory
Dilzer Consultants Pvt Ltd
10 June 2016