DO SPOUSES NEED THE SAME AMOUNT OF LIFE INSURANCE?
Pat and Kelly, new parents, made a couple monthly budget adjustments upon the arrival of their first child. First, due to the added cost of day care and dependent health insurance, they decreased the amount they were saving for a house. And second, they agreed to review their life insurance needs. Pat’s sister suggested they buy $500,000 life insurance policies like she and her husband did when their child was born.
Given the disparity in their incomes, Pat and Kelly were not convinced they each needed another $500,000 of life insurance.
Here’s what they learned from talking to their agent.
In two income households where one income is significantly more than the other, the cash and income needs for the surviving spouse will vary.
Their agent explained the three primary areas for concern are the:
- Employment status of the surviving spouse
- Variation of replacement income
- Existing life insurance
Pat and Kelly indicated they would continue to work in the event the other died. That’s important because replacing both incomes would dramatically increase the need for life insurance. Plus, the surviving spouse’s income impacts the amount of the Social Security Survivor Benefit.
If Pat died, Kelly would have to replace Pat’s $75,000 income whereas Pat would only have to replace Kelly’s $35,000 income. That $40,000 difference would result in a significant difference in the income replacement analysis.
When they got married two years ago, they bought $250,000 life insurance policies in anticipation of buying a house. Pat had a $75,000 group life insurance benefit but Kelly’s company did not provide any group life insurance. This extra $75,000 of available cash to Kelly at Pat’s death would affect the net cash available calculation.
They asked their agent if the recommendation by Pat’s sister seemed reasonable. The agent created the following analysis for them.
| Pat | Net Cash Available | Kelly |
$325,000 | Current Life Insurance | $250,000 |
$500,000 | Proposed Life Insurance | $500,000 |
$825,000 | Life Insurance Total | $750,000 |
$35,000 | Savings | $35,000 |
$860,000 | Total Cash Available | $785,000 |
-$25,000 | Debt | -$25,000 |
-$200,000 | Mortgage Fund | -$200,000 |
$635,000 | Net Cash Available for Beneficiary | $560,000 |
| Pat | Income Available | Kelly |
$75,000 | Annual Income | $35,000 |
$28,000 1 | Interest Earnings | $31,750 2 |
$103,000 | Income Available | $66,750 |
1. (5% x $560,000 Net Cash Available)
2. (5% x $635,000 Net Cash Available)
Reviewing the analysis, Pat determined the analysis did not factor in their son’s Social Security Survivor Benefit (SSSB) and without a mortgage payment or any other debt, $103,000 was more income than needed. With that in mind, the $500,000 policy on Kelly seemed to be excessive.
On the other hand, Kelly believed the $500,000 of life insurance on Pat only provided $66,750 of income which, even with the SSSB, was inadequate.
Upon the birth of a child or any other life event, it’s likely that you will receive advice from friends or relatives on how much and what type of life insurance you should buy.
But remember, if there is a significant difference in income and current life insurance coverage, determining the amount of life insurance for each spouse, is best resolved by considering your individual cash and income needs.
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