Let’s take a look at how your family’s expenses will change if you’re no longer around.
(We know it isn’t the most uplifting exercise, but humour us so we can illustrate our key point.)
Let’s start by considering your housing expenses, such as your mortgage payment, property tax, utilities, cable, and WiFi. It’s unlikely that your family will be able to cut down on these expenses if you were to pass. After all, you can’t ask your cable company for a half portion of your Internet plan. Because these expenses don’t change much depending on the number of people in your household, we call them “fixed expenses.” You may not realize it (or maybe you just don’t want to think about it), but fixed expenses make up more than 30% of your monthly expenses! This means at least 30% of your family’s monthly expenses will remain the same after you pass.
We know what you’re thinking: “That still leaves 60%. What are those expenses for?” If your family is like most families, you probably spend this piece of the pie on food, transportation, clothing, personal care, and other discretionary expenses (like a beach vacation, designer heels, or unnecessary-but-oh-so-tasty weekly smoothies). Most of these expenses will drop with one fewer person in the house, but they won’t disappear completely. We estimate that about 60% or more of these expenses will remain for families left with a single income.
When you put all of this together, you can see that your family will still have to cover 60%–70% of your monthly expenses after you pass.
And unless your kid is bringing in the dough as a child movie star, your family will be paying these expenses while relying on a single income.
Because of this, one or two years of income replacement probably won’t be enough to allow your family to maintain their lifestyle.
Not convinced? Think about it this way: 1x to 2x your salary is only one or two years for your family to adjust to a single-income salary. What about the house you bought when you thought two people would be contributing to the payments? And what about all the other lifestyle perks your family has become accustomed to—the vacations, after-school sports, restaurant meals, and outings?