Of all the things that I get to help clients and families with on a daily basis, this may be the most important for them and definitely one that I am most passionate about. Close your eyes and imagine that beautiful life you have built for yourself; great job, nice place to live, incredible family. What would happen to all of those things if you were to unexpectedly pass away? Life insurance is designed to replace the income, wages and assets that people and their loved ones rely on that are lost due to death. The proceeds from life insurance are paid out to a designated beneficiary, tax free (a key factor which makes it a wise investment), and are typically used for the mortgage, bills, groceries, college savings, child care and retirement. It tends to be a touchy subject with most people, because let’s be honest, who likes to think about and plan for their own death? The problem with this thinking comes when the unexpected does, in fact, happen, and your family and loved ones are left scrambling to make ends meet, in addition to dealing with the grief. At the end of the day, when you lay your head down on your pillow, it is comforting to know that if something happens to you, your family and loved ones will be taken care of. September is Life Insurance Awareness Month, and I am delighted to be able to take this time to shine a spotlight on the need for such a critical piece of a solid financial plan. This will be the first of a four part series designed on going over the basics, the different types of insurance, the pros and cons of each, what the best choice for you may be and also the common myths surrounding life insurance that are unfounded. Let’s dive right in and get you protected!
Protection First
This is one of my major philosophies of financial planning. Many people want to jump right into the stock market or real estate or some other investment the minute that they get a spare dollar in their hands. Some people want to just go shopping, or go on lavish vacations. While investing the money is sure better than blowing it on ANOTHER pair of shoes, we have to first make sure that our income and assets are protected, before we take any risk that comes with spending/investing our money. The central idea of “Protection First” is that if your money, assets, and income are not protected, you are exposing all of your hard earned wealth and future to significant risk. I don’t just mean risk of the market going down or your investment going belly up, but also the risk of pre-mature death, disability or medical emergency that will inevitably place an enormous financial burden on your loved ones in your absence. You have insurance on your cars and home to protect yourself from a potential disaster, right? Why would you not have the same protection on your life and your income? The most accurate statistic, unfortunately, is that 100% of the people on this planet will eventually pass away. It cannot be disputed. So when you ask, “who really needs life insurance?” My answer is, EVERYONE!
Common Life Insurance Myths Debunked
Now that you have a better idea of the value that life insurance can provide, let’s put to bed some of the common complaints and myths surrounding it.
“I have Life Insurance through work, so I don’t need anything else.”
This is, hands down, the most common response that I get from clients when asked about their life insurance. Honestly, having life insurance through work is great. I am glad the companies are offering it and people are taking advantage of it. It definitely helps. However, the problem with life insurance from work is two-fold:
- It is only a tiny amount of coverage, and that is just designed to help with immediate expenses, funeral costs etc, not meant to supplement years of future of income that will be lost due to the death of a loved one. Think about the life insurance you have from work. It is probably some multiple of your salary, whether it be 1x salary or 1.5x salary. Is that really going to help your spouse, or children, or loved ones down the road, three, five, ten years from now? The mortgage doesn’t stop coming just because you passed away, neither do the credit card bills or tuition for Junior’s college. What if you are in sales or depend on commission/bonuses for the bulk of your income? That whole 1.5 x salary number looks pretty paltry compared to what your family actually needs and relies on. Experts recommend anywhere from 6-8 x your salary needed in coverage, and if you are in your 20’s, this number probably goes up to 12-15 x salary.
- Life Insurance from work, in most cases, is not portable. Once you leave that job, you do not get to retain the coverage and take it wherever you go free of charge. Your coverage usually expires the day you leave or 30 days after the end of the month that you leave, depending on your company’s benefit guidelines. That is why having a policy outside of your job or career provides the most dependable and long lasting form of protection possible.
“My wife doesn’t work. She stays home with the kids. She doesn’t need insurance.”
While it is true that your spouse does not necessarily provide income in the form of wages, in this scenario, he/she provides a tremendous value to the family that needs to be accounted for and protected against in the event of a death. If your spouse passes away and you have young children, who will watch them during the day while you are at work? Anyone who has had to spend money on day care knows that it can be financially crippling. Did your spouse plan to go back to work when the kids got older to help pay for college or some extra money for groceries or bills? If he/she passes away, those are lost wages that are gone forever, and need to be replaced. This is where the planning is critical. Having a plan in place makes it easier to account for and handle the unexpected.
“I am too young to worry about life insurance. I don’t need it right now”
I would argue in this scenario, the opposite is true. Being young and healthy is the BEST time to purchase life insurance, particularly if you are using a permanent cash value life insurance policy as a wealth building tool for the future (basically the money that you pay into the policy grows over time and is available for you to use throughout the course of your life, but I will get more in depth on this in a future article). The cost of life insurance is based on life expectancy, taking into account both your age and health. To put it simply, the lower the risk you are to the insurance company of dying anytime soon, the lower the cost you have to pay for the coverage. What better time to take advantage of being young and healthy than right now? Maybe you plan on being single for your entire life and don’t think you need to leave any money to any loved ones if you die. I would say, be careful with that thinking. Life changes, and our needs and wants change over time. I once had a client who swore to me he would never get married or have children, and therefore he did not think he needed coverage. A few years later, he found himself engaged with a beautiful baby girl. The problem was, he was older and developed a few health conditions that made him a greater risk. His insurance was three times higher than it would have been had he gotten it when I initially mentioned it to him. Take advantage of your youth and plan for the future now. You will be much happier that you did.
“I just can’t afford life insurance right now. I have too much other stuff to pay for.”
This is probably the one objection that I am most sympathetic to. It is difficult when a family is struggling to make ends meet, yet doesn’t have any life insurance coverage. The problem is, as hard as it is now, think of how much more difficult it would be to make ends meet if one of the parents or spouses passes away unexpectedly. It is a sad reality, but one that absolutely has to be planned for. On a brighter note, basic life insurance coverage is nowhere near as expensive as people think. Almost all families should be able to afford something, particularly if you are able to shop around and find the best price. This is where teaming up with a financial planner can be most effective. A financial expert who knows the game inside and out will be able to price shop and find you and your family the best possible coverage that fits your budget. He/She may also be able to breakdown your financial situation to be able to find a few extra dollars each month in your budget with which to finance it. Even if the coverage is minimal, something is so much better than nothing, particularly when you consider the alternative and the what if scenarios that could happen without it. There are also options on certain policies which allow you to purchase more/different coverage in the future should you need it and your financial situation improves. I will get more in depth with that topic next time.
The bottom line is that life insurance is a critical piece to any person or family’s financial plan. Protecting your income and your family comes first. There are so many different types of insurance, from cheap to expensive, temporary to permanent, and so on, that there will almost assuredly be something out there that fits your needs, long term financial goals, and most importantly, your budget. Part 2 of this series will focus on the basic components of a policy, an overview of the different types of policies, their pros and cons, and also the many features and options available to help you find exactly what you need. I look forward to continuing to guide you on this journey to protection, wealth and peace of mind.
Peace and Wealth 