The Planner's Perspective: Don't Forget About Your Life
By Paul Morrone CFP®, CPA/PFS, MSA
You own a home, you own a car, you buy insurance. It’s how things are done, it’s how your parents did it, it’s how your friends do it, and it’s something you probably didn’t think twice about. Laws and lender requirements aside, you would never go without insurance as the cost to repair or replace these assets can be staggering and upend even a financially sound household. While most don’t think twice about insuring physical assets, they often overlook insuring their biggest intangible asset, their earning potential!
While parents’ may be seen by their minor children as the proverbial money tree, parents know that it takes blood, sweat and tears to earn a living and provide the luxuries that many young or naive children take for granted. You can pick whatever analogy you want, the goose that lays golden eggs or a money tree that offers a perpetual harvest, but one thing that won’t be disputed is the irreplaceable value of such a mythical asset. Rest assure, if you had a money tree growing in your backyard you would insure it 1,000 times over.
For argument’s sake, let’s assume the risk of you having to file a homeowner’s insurance claim is roughly equivalent to you having a premature death before age 60. Whether that means a tree falls on your house and causes damage of $15,000, your house burns down and it costs $500,000 to replace, or someone hits you with a liability suit and is awarded a $1.0mm settlement, your insurance policy is there to lessen the financial blow to your bank account and other personal assets. For this assurance, you pay your annual premium and don’t think another thing of it.
From the life insurance side, it’s a little more black and white; you’re either here or you’re not. If you’re here, the cost is the same, an annual premium. If you’re not here, the costs (both tangible and intangible) can be monumental. Your spouse, children and other loved ones are now without someone they care deeply about. Furthermore, your salary each year (say $200k) is lost forever. You will no longer bring home that $200k this year, next year, or the year after, which may create a hardship for those that relied on that income. The loss of your salary may also prevent surviving family members from saving for college or retirement. If your spouse doesn’t currently work, they may be forced to get a job, pay for childcare and find benefits all in a short amount of time. The cost to replace a household member can easily (and quickly) exceed $1.0mm, even if that person isn't the primary breadwinner (or earning money at all!).
Addressing this risk does not have to be complicated or terribly expensive if done correctly utilizing term life insurance. Term polices will provide a policyholder with the highest amount of insurance for the lowest cost, and terminate once the stated period ends (usually 10, 20 or 30 years). Even a young individual purchasing insurance can cover most of their earning years with a 30-year policy, which is likely sufficient under most planning scenarios. The vast majority of Americans do not need expensive and complex insurance products such as whole life, universal life or variable life insurance, even though these are frequently sold by insurance agents earning high commissions on each sale.
If you’re unsure as to what type of insurance policy is appropriate for your individual financial plan, it may be best to consult with an independent financial planner who can provide you with an opinion regarding which type of coverage is appropriate to meet your needs. Equally as important as purchasing the correct type of policy is managing your life insurance portfolio as your financial life develops. Maybe you no longer need the policy after 15 years, maybe you need more coverage in the future or maybe a different type of insurance product is better suited for your changing life. There is no set-it-and-forget-it approach in financial planning, and maintaining the risk management portion of your plan is no exception.
State insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.