It’s not uncommon for families to have one individual provide the majority if not all the income for the lifestyle expenses of the family. Obviously, this poses an inherent risk in the case that the individual who is the primary breadwinner is relied upon to provide the income to support the family. What if that income stream were to stop? Whether that be due to getting laid off, sickness or disability, or in the worst of cases death, the family should be protected. Failing to protect your family in one of these unfortunate cases can only amplify the stress of the situation. This article will discuss the various strategies that can be used to protect against a loss of income as a single income family.
Understand the Risk
First and foremost, it’s important to understand the risk of maintaining a single income household. With two income streams, there’s likely some flexibility in being able to adapt should one person no longer provide income. However, if both individuals aren’t able to provide income for the family, how will your family be able to support itself?
Even if the spouse who previously didn’t work, was able to get a job, if they’ve been out of work for a while their income likely isn’t where the working spouse’s income was due to years of wage increases, job promotions, and adopting more skills in the workplace. Again, this would pose a massive lifestyle change in order to align the new income with what your family is able to spend, invest, or use towards other financial goals.
In this context, the need for protection against these scenarios is apparent.
Protecting Against a Short Term Loss of Income
The first thing anyone can do to protect against a short-term loss of income is to have an emergency fund set aside. An emergency fund should be anywhere between 3-6 months worth of living expenses set aside in cash. In the case of a single income family, it’s better to error on the side of caution and set aside close to 6 months worth of expenses in cash. The idea being that if there’s a short-term loss of income, the family will be able to pull from the cash stockpile without having to use consumer debt or withdraw from investments.
Short-term disability insurance can also be used to protect against a loss of income due to sickness, injury, or even the birth of a child. Depending on the specific policy, it can cover anywhere from 40-60% of weekly gross income for up to as long as 1 year. Your employer may offer a group policy as part of their benefits package, so be sure to review prior to purchasing anything on the private marketplace.
You may ask, why do I need short-term disability insurance if I already have 6 months worth of living expenses in cash? The answer is while you may have enough cash set aside to support your lifestyle for up to 6 months without income, you won’t have enough to make progress towards other financial goals. If you’ve been working on paying off student loan debt, saving for retirement, or a child’s college savings, all these goals would likely have to be put on hold without a short-term disability policy in place to replace some of your income.
Protecting Against A Long-Term Loss of Income
Whether a debilitating disease or injury no longer enables you to work, it’s extremely important to have a long-term disability plan in place. Many employers offer this as a free benefit as well, however, it may “only” be up to 40-60% of gross income. Whereas most disability experts will recommend between 60-80% in coverage. It’s estimated that 1 in 4 millennials will have a long-term disability at some point in their lives according to the social security administration. Being without income, especially for a single income household for an extended period of time can have a dramatic effect on the families ability to achieve its long-term financial goals.
In the worst case scenario, the breadwinner of the family passes away unexpectedly and their source of income stops completely. What if the family has a mortgage? Wanted to provide for their children’s college educations? Or ensure their surviving spouse could still focus on raising the kids and not go back to work? In this scenario, it’s imperative that the family purchase a life insurance policy to ensure all these goals could still be achieved.
In the vast majority of case, a term life insurance policy is sufficient to protect against this scenario. For young, healthy individuals, a term life insurance policy insuring them and assigning the surviving spouse as the beneficiary of the death benefit, is going to be cheap and easy to implement. The policy should be enough to cover any debt obligations and future loss of income that could be used towards financial goals such as a child’s college expenses or living expenses to support the family. Typically, aligning the term of the policy (15, 20, 25, or 30 years) with the length of time until retirement, mortgage, or other time sensitive goals, is advised. However, if you receive a quote that’s extremely cheap and provides enough coverage for 30 years, you might as well lock in the rate since it will never increase and over time become even cheaper as inflation erodes at other expenses.
Again, be sure to review your employer’s benefits and whether they offer a group life insurance policy. Even if they do, it can be beneficial to purchase the policy through the private marketplace because that policy will move with you. Whereas you may be required to update the terms of your group policy should you leave your employer and decide to keep it. Effectively increasing the premiums you have to pay to keep it in effect.
The Bottom Line
For single-income households, the key is to understand the risk of one income and what the effect of losing that income could be on the family as a whole. From there, review employer benefits and whether any disability or life insurance policies are able to curb some of that risk. If not, or if additional insurance is needed, purchase policies in the private marketplace. If you’re unsure of how much coverage you need, the cost of coverage, or where to even get started, schedule a free consultation with me today. Our financial planning process incorporates risk management, and insurance as part of our comprehensive advice!
Levi Sanchez is a CERTIFIED FINANCIAL PLANNER™, BEHAVIORAL FINANCIAL ADVISOR™ and Co-Founder of Millennial Wealth, a fee-only financial planning firm for young professionals and tech industry employees. He is an avid sports fan, personal finance and investing geek, and enjoys a great TV show or movie. His mission is to help educate his generation about better money habits and provide financial planning services to those who want to start planning for their future today!