Written by: Corey Janoff
September is life insurance awareness month, so I figured it would only be fitting to include a blog post about life insurance this month. I’ll admit, it’s not the sexiest of topics to discuss. Rarely do people sit up in their chair and lean forward when they hear or see something about life insurance. But, life insurance is a very important piece to a sound financial strategy.
Let me share a story with you. Several years ago, at our annual company banquet, we had a guest speaker. She was a client of Finity Group (and still is today). She was there to tell her story to everyone in attendance. She and her husband were both physicians in residency, about to graduate and enter practice a few months later. She was in family medicine and he was an anesthesiologist. They had one toddler and another baby on the way. Life was busy and hectic.
They had a big dreams and plans for the future. One of the homework assignments their financial advisor had given them was to apply for life insurance. They had the application sitting on the kitchen counter, but they kept putting it off for later. “We’ll fill it out this weekend” turned into, “We’ll fill it out when we have a break after we graduate residency.” I think you can see where this story is going.
One day her husband died unexpectedly. All of their big dreams and plans went out the window. She wasn’t even sure how she was going to get through her pregnancy, let alone carry on with life as a single mother.
Obviously having life insurance wouldn’t have brought her husband back, but it would have alleviated some of the financial stresses she faced during that time. She could have taken a year off work to be at home with the baby before starting her job as an attending. She could have purchased a house with no mortgage, or set money aside for the kids to go to college. Many of her financial worries would have been calmed if her husband had a life insurance policy in force at the time of his passing.
It Won’t Happen to Me
We all have that optimism bias and think we are somehow excluded from the statistical probability of something bad happening. We all know auto-accidents are one of the leading causes of death (outside of illnesses), yet we still drive to work every day, confident that we won’t get in a fatal car crash.
Odds are you won’t die prematurely, but if you are 30 years old today, there is about a 12% chance you will die before you turn 60, according to the Social Security Administration’s Actuarial Life Table. For a 40-year-old, the odds are at about 10.5%. In other words, a 30-year-old has about a 12% chance of dying in the next 30 years. A 40-year-old has a 10.5% chance of dying in the next 20 years.
We all know someone who died in an accident, or who was diagnosed with a terminal illness. I knew a couple of non-smokers who died of lung cancer before their time should have been up! Several friends growing up had parents pass away. One of our neighbors recently lost his spouse & mother of his children to cancer in her early 30’s. It happens.
How Will an Untimely Death Affect You?
For most people, dying before the age of 60 will cause some financial strain on their family. Obviously if you are single with no dependents, that may not be an issue, but you may still have a need for life insurance depending on your financial goals.
Even if you aren’t the primary breadwinner in the family, having life insurance is important. I can barely take care of one kid by myself for a few hours. If my wife dies and leaves me alone with both of them, I’m screwed! I’ll likely have to scale way back at work and rely heavily on my parents (as long as they are still able-bodied), or hire a full-time nanny. Both options would put a sizeable dent in the bank account. That is why I have life insurance on my wife. Just in case. It won’t make things any easier, but I’ll at least not have to worry about the financial burden of being a single parent.
If the primary breadwinner in the family dies, the financial ramifications are often underestimated. If you really sit down to think about how much your family would need to maintain their lifestyle without that income, the number is astonishing. Think about it.
There is the mortgage, car loan, and any other outstanding debt (except your student loans will likely be forgiven upon death). Whatever those debts add up to will get taken right off of the top, since the bank will be the first ones who come calling when they find out they have a loan outstanding to a dead person. Either pay off the mortgage in full right now, or we’ll take the house from you.
If you want to pay for your children to go to college, you will need to set some money aside for that. Today the total cost of attendance for the typical in-state public school is about $30,000/year. Private schools are upwards of $70k in many cases. Google “Cost of Attendance <School Name>” to see what your alma mater costs now. If tuition rates continue to rise at the pace they have been for the last decade or so, 15-20 years from now it will cost about $250k to send one kid to the in-state public school for four years. If you aspire to send them to any school they can get into, prepare for upwards of $500k a head. This doesn’t include additional grad school, medical school, law school, etc.
Then there is cost of living. You probably need to plan for living expenses until the children are completely out of the house and self-sufficient at the earliest. Unless you want your surviving spouse to feel pressured to work more or re-marry, you may want to plan on some living expenses for the remainder of his or her life.
Using back-of-the-napkin math here, if you have a $400,000 mortgage, $60k home equity line of credit, and a $40,000 auto loan, you’ll need at least $500,000 of life insurance just to clear the debts.
If you have two children that you want to send to college, depending on how old they are you probably need to have at least $250k set aside now and hope the money can grow a little bit before they need it for school.
Then add up the groceries, utility bills, vacations, car lease/future car payment, gas, auto/home insurance, property taxes, clothing, shopping, entertainment, gym membership, house cleaner, landscaper, pet food, vet bills, health insurance, and any other recurring expenses. If you have $100k of annual living expenses, multiply that by however many years until your youngest child is at least 22 years old (probably 25-30 is a safer bet). If you want to really play it safe, multiply that $100k by the number of years you expect your surviving spouse to live.
Many people survive on much less than $100k/year of expenses. But even if you go with a more modest $40-60k of annual living expenses for your family, the total number adds up over 20-60 years. $50k/year times 20 years is $1,000,000. $50k/year times 50 years is $2,500,000.
Oh, don’t want to forget the cost of the funeral. The casket, gravesite/crematorium, service, post-service luncheon, etc. don’t come free. I guess you could do a BYOB potluck style funeral reception in somebody's backyard to keep costs down.
Any assets you have accumulated up to this point will help partially offset the total life insurance need. But it probably isn’t going to come close to the total number you added up in the exercise above.
Plan for the Worst, Hope for the Best
Death isn’t fun to think about. But it is important that you give it some consideration, especially if you have people who depend on you in life. How would those people be affected if you died today? Would they face a possible financial burden or hardship with you no longer around? What would the magnitude of that burden be?
If you already have life insurance, ask yourself if you have enough. Also, if you have term insurance, when does the term expire? Are you comfortable with the expiration date? If not, does your policy have the ability to convert into a permanent policy without medical underwriting? If not, you may want to look at getting a longer lasting policy, or one that does allow you to convert into a permanent policy.
If your term policy is set to expire sooner than you would like and you are currently in decent health, it could be worth applying for a new term policy to extend your coverage.
The ability to purchase life insurance is contingent on health, and the cost is based on age and health. It is easier to qualify for when you are younger and healthier. It is less expensive when you are younger and healthier. Rarely do people get younger and healthier over time. So sooner, rather than later, is when you should consider life insurance if you don’t have it.
Even if you are single with no kids. If you plan to settle down and start a family one day, use your age and health to your advantage and lock in some coverage at favorable rates today! Once you have signed up, the insurance company can never take the policy away from you, even if your health changes in the future.
If you need guidance on where to look, how much to get, what type of policy is appropriate for you, what companies to look at, or anything else, feel free to contact us and one of our advisors can help you out.