Suze Orman Says This Is the Mistake Many People Are Making When It Comes to Life Insurance

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  • It's important to buy the right amount of life insurance when there are children involved.
  • Only buying a policy for one parent could prove very problematic.

It's a trap you don't want to fall into.

If money is tight, or if you're saving up for different financial goals, then you may not want to spend money on extra expenses. As such, you may be inclined to try to keep your life insurance costs to a minimum. And that could mean only insuring one parent in a two-parent household.

But on a recent podcast episode, Suze Orman said that one of the biggest mistakes she sees people make when it comes to life insurance is not buying coverage for both parents when there's a child involved. And that's a mistake you should make every effort to avoid.

You don't want to fall into a common trap

It's often the case that when there are kids in the mix, one parent becomes the sole breadwinner for the household while the other becomes a stay-at-home parent, at least until the children involved are old enough to attend school. And in many situations, this decision doesn't just make life easier -- it makes financial sense.

The cost of childcare has soared over the past number of years. If you have a parent who's not such a high earner, and you have multiple children who aren't yet school-aged, you may find that the cost of daycare virtually wipes out that parent's income. And in that case, what's the point of rushing to daycare on a daily basis and spending all that money to only come away with a miniscule amount of money each month?

Now in that scenario, you might assume it only pays to buy life insurance for the working spouse. After all, the non-working spouse isn't earning an income. So if that spouse were to pass away, your family wouldn't be in a worse financial situation, right?

Well, not necessarily. If your non-working spouse is a full-time caregiver to your children, and then they're no longer around, you'll suddenly need to pay for care. And that could eat up a large chunk of your salary.

Here's another way to think about it. Let's say it would cost $24,000 a year to put your two young kids into a full-time daycare facility so you can work full-time (sadly, this number is a lowball estimate in some parts of the country). Meanwhile, let's say you earn a $75,000 salary your family can live comfortably on in the absence of having to pay for childcare.

If your caregiving spouse dies, suddenly, you're looking at spending almost one-third of your income on daycare costs. That changes your financial picture a lot.

A lack of earnings shouldn't mean a lack of insurance

You may not need to buy the same amount of life insurance for a non-working spouse as a working spouse. But that doesn't mean you should forgo coverage for a spouse who stays home and looks after the kids.

Losing that spouse might not mean losing an income. But it could mean incurring a host of hefty expenses. And at a time when you're grieving the loss of a loved one, the last thing you need are financial worries as well.

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