Do you have enough life insurance? Pete the Planner now thinks he needs more
Americans die with an average debt of $62,000. Here are some ways to manage that debt before it’s too late. USA TODAY
Don’t get me wrong, I have life insurance, but I haven’t purchased any additional life insurance, with the exception of the group plan I set up for my company, since my wife was pregnant with our second child.
And up until this week, I’ve enjoyed the peace of mind that comes with purchasing the right amount of life insurance to protect the financial interests of my family in the event of my death.
I have no idea why, but this week I decided to take a closer look at this part of my financial plan. And, at the risk of filling up my inbox with emails from every insurance agent in America, I’m pretty sure I need more life insurance.
I’ll explain why, but first some notes on life insurance in general.
It’s meant to fill a void
Life insurance isn’t some sort of strange “I’m sorry” award for your family when you pass away. And, while it’s often a windfall, it’s not really meant to create a lottery winner’s lifestyle. Life insurance is meant to fill the financial void created by your absence.
You can, of course, use life insurance proceeds to pay off debts and fund particular needs, but its most powerful purpose is income replacement. My income is the fuel for my family’s financial present and its future. No fuel, no future.
For families with young children, or couples who have only one source of work income, I recommend a life insurance amount equaling at least 10 times an earner’s income. Nonearners need life insurance too, especially if young children are involved. A fundamental truth about life insurance is that you purchase it knowing you won’t directly benefit from using it.
Am I bothered when I see someone doesn’t purchase life insurance because they won’t be around to benefit from its payout? I guess. I’m more sad than mad. What I see is a person choosing to leave their loved ones exposed to the possibility of financial tragedy. I’m both sad for the family and sad that the person making this choice feels the way they do.
The strangest part about my realization that I need more life insurance is that my financial life hasn’t really changed drastically in the last seven years. My income has increased modestly, as have my expenses. The only two elements of my plan that have changed are the refinement of my goals and growing awareness of my original plan’s flaws.
Seven years ago, I had no clear vision of retirement. Don’t get me wrong, I was aggressively saving for it, with faith I’d match the funds with a vision someday. That faith was well-placed. I’ve worked in the financial industry for 20 years, and it took me 19 years to figure out what I wanted retirement to look like. (As a side note, if you haven’t quite been able to picture your retirement yet, don’t be too hard on yourself. Just keep at it.)
In order to achieve my retirement vision, I figured out that I needed to move my retirement date sooner. Basically, I gave myself less time to fund retirement. And in the event of my early death prior to retirement, I still want my wife to be able to complete our goal without me. This meant rethinking my life insurance plan.
Life insurance needs are not static. And it’s not just significant life events, such as the birth of a child or job change, which create the need for increased coverage. Underfunding your financial goals, especially retirement, can also create problems for your partner if you die and leave them with less income to fund those goals.
Underestimating can cost you later
I have no reason to believe I’ll run into any insurability issues when I apply for my increased amount of coverage, but uninsurability can ruin a person’s life insurance plans. The life insurance company I selected seven years ago felt I was an acceptable risk then, but there’s no guarantee they’ll make the same judgment today. They could potentially charge me more if they decide I’m in poor health or even deny me altogether. Whether my health is considered good or bad, I do know the coverage will now be more expensive because I’m 40 years old, not 33.
The best way to avoid the same problem is to over-insure yourself a bit with your next life insurance purchase. Paying for more life insurance than you need isn’t ideal, but it’s better than the alternative – dying without the proper amount. And going forward, evaluate your life insurance needs every three to five years to see if changes in priorities and goals have again adjusted your need for coverage.
Peter Dunn is an author, speaker and radio host, and he has a free podcast: “Million Dollar Plan.” Have a question for Pete the Planner? Email him at AskPete@petetheplanner.com. The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.