Is it necessary to provide insurance cover for someone who is not earning an income? Absolutely! The stay at home spouse is equally as important to the family, in both an economic and emotional sense, as the principal breadwinner. There are a number of additional considerations that should be taken into account when determining the sum insured for a stay at home spouse. The value of a stay at home spouse
When calculating the value of the life insured for a Life policy, it’s important for advisers to consider the role of the stay at home spouse – it shouldn’t be underestimated. A study by the Australian Bureau of Statistics titled “Measuring the Value of Unpaid Household, Caring and Voluntary Work of Older Australians” (2003)1 found that the value of a woman, aged 25 – 44 years, managing housework, shopping and looking after children was $45,617.
There are a number of ways to calculate how much money will be required if the homemaker dies, but there are a couple of simple rules of thumb.
First, you must determine how long the client will need to care for dependent children – usually from birth to age 20. So the maximum amount required to replace the duties of the homemaker would be: 20 x $45,617 = $912,340. If the dependent children are older (say the youngest is 13 years old), then this amount be reduced (20 – 13) x $45,617 = 7 x $45,617 = $319,319.
The costs associated with raising children should also be considered. An AMP/NATSEM2 study found that the cost of raising two children in Australia had reached more than half a million dollars. From birth to the age of 21, a typical middle income Australian family spends $537,000 with the biggest costs being education, food and childcare. The report also identified that almost half of all adult-children aged between 21 and 25 are choosing to remain living in the family home. Parents in 2007 are burdened with large weekly costs so it’s imperative that there is insurance cover in place to protect the lifestyle of family members if one or both parent dies or is incapacitated..
Factoring in the family debts
Outstanding family debts should also be included when determining the amount of life insurance required for the homemaker. The largest debt most families have is the family mortgage. Although the homemaker may not actually make any payments towards the mortgage, there is still an inherent value in their contribution to the family. The rationale behind this is that if the homemaker were to die, the principal breadwinner would most likely need to modify or reduce the number of hours worked in order to provide appropriate emotional support for the family. This reduction in hours worked may adversely affect the ability to pay the mortgage.
The maximum allowable sum insured for a non working spouse is generally set at $1,000,000. CommInsure may consider individual Life cover in excess of $1,000,000 taking into account the working spouse’s income, loan commitments, number and age of dependents – for example, it would be reasonable to provide for the discharge of up to 50% of any shared debt of the family home.
Conclusion
When discussing wealth protection with couples, it’s important to place a value on the contribution of both partners.
There are simple calculations which can be applied to determine the sum insured for a stay at home spouse.
CommInsure does not require financial evidence for homemakers applying for Life/TPD/Trauma cover up to $1,000,000. Amounts in excess of $1 million (Life only) must be forwarded to the Chief Underwriter for consideration.
1 Australian Bureau of Statistics – Australian Social Trends 2001.
2 Australian Child Costs in 2007 - "Honey, I calculated the kids … it's $537,000". AMP.NATSEM Income and Wealth Report. Issue 18. December 2007.
Disclaimer
The information provided
is general in nature and does not take into account
your particular insurance needs, financial situation
or investment objectives. We recommend that you speak to
an xLife risk advisor before you make any decision regarding life insurance.
