What’s Worth More, My Lexus or My Life?
During the course of discussing Term Life Insurance with clients, there is a question I am asked much more often than one would guess: If I am still living at the end of the Term, haven’t I just wasted all that money? I always find it a bit curious that some people view Life Insurance so differently than Auto Insurance or Health Insurance. By definition, Insurance is a contact by which a company agrees to provide financial compensation to a consumer in the event of a loss in exchange for a (relatively) small premium.
Most everyone obtains Auto Insurance, not because they are planning on crashing their nice new car, but in the event that an accident does happen, you won’t be out tens of thousands of dollars. I’ve never heard anyone protest that they wasted all that money on auto premiums over 20 years, even if they haven’t made a claim because we all know it’s a vital necessity to protect us in the event of an accident. If anything, Life Insurance is even more critical. While some families may be able to absorb the cost of a vehicle, there aren’t many I know who will be able to replace the hundreds of thousands, maybe even millions the family loses when tragedy results in the death of a family provider.
There are all sorts of fancy formulas which will spit out the amount of Life Insurance one needs. They take into account several factors including age, income, assets/liabilities, number of children, etc. But, when it comes down to it, the decision is really a personal one. I encounter all types in this business, from those who are making minimum wage and attempt to convince the insurance company why they should qualify for a million dollars, to the executive earning $500K who carries less than one times his annual salary because they have enough assets for the surviving spouse to be able to “get by.” I usually (not always but usually) find that the very high income earners are the ones most likely to be what I would consider “under-insured”. I’m not sure why, but perhaps these folks are earning so much money that they can’t even spend it all and provide everything their family could possibly want.
Perhaps they are accustomed to having so much that they can’t ever imagine going without. This was never more evident as during the 911 tragedy when many of the victims were high powered Financial Executives earning half a million dollars per year while carrying little to no life insurance. Fortunately for their families, the Government stepped in to provide very generously, but for the average family who suffers a loss, this will not be the case. My thoughts are by no means intended to be a sweeping generalization that all higher income individuals carry inadequate amounts of insurance—many do, but rather just observations based on the last 20 years of running a Term Life Insurance brokerage and dealing with those from all walks of life.
It may sound a bit crass, but if we are forced to put a value on our lives, it does come down to how much money we are earning, to some extent. So, when the 35 year old spouse earning $500K is tragically taken away from his family, the obvious first loss is the irreplaceable value of a mother/father–and the fact that no amount of life insurance can bring that person back, but the secondary loss is the financial impact it has on the family and the loss of all the income that individual would have earned and provided to the family over his or her lifetime. In this case, possible more than $10 million dollars. It’s not an uplifting issue to address, but the financial piece is a harsh reality.
It’s definitely a discussion that needs to occur between spouses to discuss their feelings and personal preferences regarding the tragic scenario of one of them dying. If both spouses work, can the family continue to be supported on the income of just one? Should the family’s current standard of living be maintained or would they simply sell assets and adjust to less income? Are they willing to downsize the family home? In the event that one spouse stays at home to provide for children, is this the scenario you want to maintain comfortably or would that spouse simply have to go back to work and have the family situation altered?
I am surprised at how many couples seem to be willing to take their chances so to speak, opting for a lower amount of insurance and figure they will just have to adjust to the financial hardship. It’s always been my personal opinion that the relatively cheap cost of providing my family with plenty of financial security is well worth it. I always imagined that enduring such a tragedy would bring with it such emotional devastation that having an added financial burden on top of that would only compound the stress. It’s one of those situations we all fear and imagine but have a hard time really comprehending the magnitude of, and while money certainly cannot replace a family member, it can provide peace of mind to be able to take time off to love and nurture the family in a time of need.
For those of you who still want that guidance in identifying your “magic number,” I will tell you a very lose rule of thumb is 5-10 times your annual salary. This is a fairly big range, and honestly does depend quite a bit on the things aforementioned in the beginning of the blog, as well your personal preferences and desires for your family in the event of your death. I will also add that in the past few years, with everyone’s assets dwindling and increase in cost of living, especially college costs, I believe it’s necessary to be closer to the 10 times income than 5 if you are wanting to truly replace the value you bring to the family. But, if money is tight and/or you cannot qualify for the lowest rates, then 5 times is certainly better than none at all.
One last thing I will leave you with is an answer to the person who asks me, “What if I outlive the Term”? The first thing I say is CONGRATULATIONS! You are still living and that is a good thing! (Don’t feel like you have to die to “get your money’s worth”!). And, if your term is a 20 or 30, then you have likely done your job! And, what I mean by that is you have been earning money all those years to pay off your house and other debts, or close to it, your kids are reared and out of the house (hopefully!) and you’ve survived getting through the most important window of time during which your death would’ve brought the greatest financial impact. This follows the logic that the amount of insurance that you need decreases over time.
If that shiny Lexus in the driveway deserves and insurance policy, then hopefully your life does too.