Among the top five stupidest financial decisions I've ever made was the decision to purchase a whole life insurance policy.
A few months after Rob and I got married, his old college friend talked us into buying a whole life insurance product. Over the course of 2 years, we spent $3600 for $250K in coverage each. STOOOOOOPID! I was an idiot with too much money on my hands.
These days, for $45/month (since we have a term policy), we have $500K in coverage each, and as a stay at home mom, I intend to keep my life insurance policy. This is how I came to the conclusion.
Whole vs. Term
Term life insurance pays a set amount to your loved ones in the event that you die. Whole life insurance does the same thing, but it costs five to six (or in my case 10) times as much. Whole life insurance is more popular because salespeople make more money from it, but it is a horrible, horrible product.
Whole Life Insurance Policies are wealth traps. It's the type of financial product that keeps the middle class trapped from building wealth. In fact, outside of extremely rare succession planning options, whole life is a stupid product in general.
Don't buy whole life insurance. Buy term life insurance. It's cost-effective. It's a good product, and when you're talking $20/month for $500K in insurance, it's worthwhile for even stay at home moms to consider it.
If you don't believe how much better term insurance is, maybe you should check out the blog by Chris Huntley who is an insurance salesman, and he's starting the Whole Life Rebellion.
The cost benefit equation changes a ton when you're comparing $20 insurance vs $150 insurance for the same coverage.
Why I have insurance as a stay at home mom
I believe in building a term life insurance ladder. You should have enough life insurance to get from one rung of need to another and no more than the amount you need.
Life insurance is a sucky topic, but at the end of the day, you need to buy enough insurance to replace your economic value, not your worth. Don't confuse the two.
I believe that there are five events that trigger the need to consider life insurance.
If Rob and I had debt, I would undoubtedly have enough insurance to to cover the full amount of the debt. We don't have debt, so the first two rungs don't apply to us.
I also recommend that anyone who is married should have either enough money for a nice funeral and a year or two worth of your salary, so that your spouse doesn't have to upheave his or her life in the midst of their grief. Since Rob and I have plenty of cash to cover those types of things, that rung of the ladder doesn't apply to us anymore either.
However, we've got two young kids, and if I died tonight, Rob would probably spend around $200K in childcare costs over the next six years before both the kids were in school full time. Technically, Rob and I have that much money around, but not in cash or brokerage accounts, so I want at least $200K in insurance. I expect that Rob will easily cover the majority of other child related expenses with his salary post graduation, but I actually want to carry another say $150K to fill up college funds for the kids, and ease the burden of single parenting for Rob.
The final reason to consider buying life insurance is if you and your spouse are "income integrated" basically if one person earns all the money, that person needs to buy enough insurance to cover many years worth of their salary. When I was working full time, I had another $300K in life insurance through my work. I had this, so that if I kicked the bucket while Rob was still in school, he would be able to finish without worrying about income. Now that he's less than two years from his PhD, I feel comfortable dropping that $300K policy, but I'll continue to retain a $500K term life insurance policy ($150K more than is strictly necessary), to get Rob through school. Depending on our income, net worth, and kid situation post graduation, I may drop down my coverage, or I might raise it.
On the other hand, post graduation, I expect that Rob will take out another $250K in life insurance outside of work, and perhaps $250-$300K through his work. All of these would be 20 year term policies, since we intend to be rich sooner rather than later (and we're well on our way).
Moms provide important economic value
As a mom, particularly a mom of young kids, I believe that I provide an important economic value, and the value is great enough to merit life insurance.
If you're a mom with kids, please consider that the cost of quality daycare runs around $12-$30K per year. Unless you're wealthy, as a mom, you need to have enough insurance to at least get your kids into school. While you're out getting that policy, be sure your husband gets a good insurance policy too. His will need to cover several years of his salary while you transition back into the workforce.
I'm a wife, a mom, an employee, and a personal finance nerd who is devoted to spreadsheeting my way through life.