How Changes In Household Income Impacts Your Life Insurance

Key Takeaways:

• Life insurance isn’t a “set it and forget it” thing, but rather something it’s good to reevaluate periodically.
• While life insurance is important if you’re the sole breadwinner, there are other factors besides income that should be considered when it comes to insurance.
• It’s important to explore sources of life insurance outside of your employer.
• Having multiple insurance policies can offer flexibility.

We often think about life insurance during major life changes like marriage or the birth of a child. But we don’t always consider how a change in household income, either for better or worse, should be a factor in reevaluating life insurance. These days, a lot of people are experiencing a loss or reduction in income, often going from a two-income family to one. Women, in particular, are experiencing dramatic job loss during the pandemic. In September 2020 alone, 865,000 women left the U.S. workforce — four times more than men.¹ Given this dynamic landscape, here are some things to consider when your household has experienced a change in income.

Look at life insurance as part of an overall financial picture.

When there’s a major change in a family’s income, we often think of adjusting finances in terms of spending and saving, but rarely do we factor in insurance. On our “Your Turn to Win the Bread” episode of the Friends Who Talk About Money podcast, Holly and Jamie adjust to Jamie’s decision to become a stay-at-home dad in several ways, including choosing a more affordable place to live, choosing public over private school, and cutting back on unnecessary expenses. And while Holly and Jamie made a lot of smart money moves, another thing they might consider is how the change should impact their life insurance.

Life insurance isn’t necessarily just for the primary breadwinner.

Nor is it just for breadwinners, for that matter. This is a common misconception, along with one that assumes the partner with the higher income automatically needs more insurance. This has resulted in a life insurance gender gap, where insured men take out almost twice as much coverage as insured women do.² In reality, men and women should consider all the financial assets they bring to the household, including yes, income, but also things like childcare and household management.

Insurance is, however, crucial if you’re the sole breadwinner.

If your family had previously relied on two incomes to support the household and now relies on one, adding supplemental life insurance coverage might be worth considering. As a one income household, your family’s future is now riding solely on your salary to maintain their livelihood if something were to happen to you. A low-cost term policy could be a great option. After all, a relatively small monthly expense is worth it knowing that your family would have the policy death benefit to help address their needs.

Tricks of the trade can help you personalize your life insurance to work best for your family.

While it used to be common to just multiply your income by 10 to figure out the amount of life insurance coverage you need, the reality is slightly more nuanced.

Here are some lesser-known benefits to consider:

• Purchase your supplemental life insurance policy from somewhere other than your employer. Unlike 401(k) accounts, most life insurance policies are not portable, so they don’t carry over from job to job.³
• Consider buying multiple policies that correspond with your children’s ages and therefore their anticipated educational costs. A longer policy to cover expenses for a younger child and a shorter one to cover an older child, for example, gives you more flexibility.⁴
• If your situation is complicated, an expert can help. Unique factors could include a child with a learning disability or a job that requires a lot of travel which places greater value on a stay-at-home parent.⁵

Reevaluate your life insurance on a regular basis.

While a change in household income is a great reason to review your life insurance, experts recommend taking a look at your coverage on an annual basis, regardless of major life changes. You’ll want to look at your overall debt and financial responsibilities as part of your review and adjust your coverage as needed.⁶

Citations:

¹ NPR: “Stuck-At-Home Moms: The Pandemic’s Devastating Toll On Women” by Pallavi Gogoi, October 28, 2020 https://www.npr.org/2020/10/28/928253674/stuck-at-home-moms-the-pandemics-devastating-toll-on-women

² Forbes: “Yes, There Is A Life Insurance Gender Gap” by Yaron Ben-Zvi, October 25, 2019 https://www.forbes.com/sites/forbesfinancecouncil/2019/10/25/yes-there-is-a-life-insurance-gender-gap/?sh=4623ed4cff5b

³ WiseBread: “New Breadwinner in the Household: How Does This Affect Life Insurance?” by Julie Rains, December 12, 2012 https://www.wisebread.com/new-breadwinner-in-the-household-how-does-this-affect-life-insurance

⁴ WiseBread: “New Breadwinner in the Household: How Does This Affect Life Insurance?” by Julie Rains, December 12, 2012 https://www.wisebread.com/new-breadwinner-in-the-household-how-does-this-affect-life-insurance

⁵ WiseBread: “New Breadwinner in the Household: How Does This Affect Life Insurance?” by Julie Rains, December 12, 2012 https://www.wisebread.com/new-breadwinner-in-the-household-how-does-this-affect-life-insurance

⁶ AllBusiness: “How Often Should You Review Your Life Insurance Policy?” https://www.allbusiness.com/how-often-should-you-review-your-life-insurance-policy-9443-1.html

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Life insurance products are issued by: John Hancock Life Insurance Company (U.S.A.), Boston, MA 02116 (not licensed in New York) and John Hancock Life Insurance Company of New York, Valhalla, NY 10595.

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