Broker Check
What would it cost to replace you?

What would it cost to replace you?

July 21, 2023

We're all priceless. There should not be a price set on the value of someone's worth as a person.

However, in the context of this article if someone relies on your income or resources, an estimate of the amount of income it would take to replace those resources can be done.

If the people that you care for rely on your income and resources to help their lives be better what happens when your income is no longer there? How is that replaced?

We will all take a last breath one day, that's going to happen. It's not negotiable, it’s not in the might happen, it’s in the will happen category.

When that last breath happens will replacement income flow to those who need it?  If you have planned for this, congratulations.  A follow-up question is if the amount you have planned is enough or even more than is needed?

If you’re not sure, then are you ready to talk about this and get a plan in place?

If you haven't guessed by now, I’m talking about life insurance.

Life insurance is one of those topics that makes people uncomfortable. Perhaps it’s because it's acknowledging that we all have an end and that conversation is unsettling to some.

Now there are people who maybe truly don't need any additional coverage because they have planned well. But the vast, vast majority of people probably need more coverage than they actually have.

That's because either they have none yet or perhaps life events have changed and what they bought years ago is no longer enough if they take that last breath sooner than expected.

We don’t know when our time ends, but if you live to be a very ripe old age, your children are grown, the house is paid off, perhaps you need very little coverage.  Just enough to help cover final funeral expenses so that this is not a burden on those who survive you.

But maybe, you now have a mortgage or two, you have kids or grandkids that are counting on you for college or trade school cost assistance, perhaps you have a non-profit that you care deeply about that could use a boost of funds.

Perhaps you are a business owner and coverage could help the business continue long enough for your heirs to sell it, perhaps you have business partners that could use funds to buy out your share of the business to your spouse and they can continue to run the business.  Some businesses require very specific licenses to exist and without those licenses the business could cease to exist and its sales value along with it and your heirs end up with nothing of value.  Insurance proceeds might keep the business running long enough to find a buyer and get some value from a sale.

Perhaps you’ve done well in life and accumulated a large amount of assets, but those assets are not liquid (easily converted to cash) and those who inherit your hard work will have to sell investments simply to pay the taxes owed whereas insurance could pay for those taxes and help preserve those assets for future growth.

Maybe your parents took out a reverse mortgage on their home to help fund their retirement years. When they pass where will that money come from to pay back the reverse mortgage?   An insurance policy or sell the house?  I’ve seen childhood homes lost because there were not enough funds available to pay back a reverse mortgage so the home was sold when possibly life insurance could have kept the property in the family.

But how much coverage do you need?   Everyone will have a different answer to that, from the rare few who need no coverage, to those who should have at least a few million dollars in coverage.

Recently I wrote an article about someone who retired and expected to outlive their spouse.   This link should take you to that Blog article.

Unfortunately, they passed before the other spouse and not only did their retirement pension income stop, they did not have any life insurance in place and the surviving spouse still has a mortgage to pay even though they only get Social Security income.  In their case a family member is stepping in to help cover the mortgage but this is a perfect example of poor planning while younger caused severe consequences much later in life.

Insurance is not free and because there is a cost some people choose not to buy it.  It’s a personal decision but I would suggest that if that has been your decision not to get some level of coverage to reconsider it for the sake of those left behind. 

Car insurance is required by law, and hopefully you may never need to collect on it for your entire life. But for life insurance, no matter how carefully you drive, no matter how healthy you are you will eventually take a last breath and if you have coverage in place someone should benefit from it.

Some people put off the decision to buy life insurance because they are confused by which kind to buy.  I agree there are a lot of different types of insurance out there but there are basic models and then variations of those.  Once you understand the basic types it helps to understand the variations more.

When you understand how insurance is priced it can help to decide which type of insurance works best and why waiting later in life to buy coverage gets more expensive.

While you don’t know when you will pass, and the insurance company doesn’t know either, they have millions upon millions of data points accumulated across decades and using your demographic data such as age, male or female, health, occupation, they can statistically estimate when you are possibly likely to pass.

It’s just an estimate of course, but they have massive amounts of data upon which to draw and these data points are what determine how much your insurance premium will be for the type and amount of coverage that you would like.

So you can see that the later in life you purchase coverage, the closer you are statistically to passing and the more that the insurance company will charge you so that they still make a profit since they are a for profit business.

There are insurance coverages that you pay for your entire life, typically called whole life coverage.  There are insurance types that you pay for a set period of time then it expires, typically called term life, because it covers a term or period of years.

Which one is better?  They both are depending on your goals and needs.   Perhaps you need extra coverage for a period of time, while you are still working, until your kids graduate college or trade school, perhaps until the mortgage is paid off. That could be covered by term insurance.  

Maybe you’d still like a base level of coverage to be around until the end with some left over for your survivors and perhaps that is a whole life type policy.

While younger people often don’t forsee the need for insurance thinking its something to buy when they are older or they still think they are invincible, remember that the older you are when you buy it, the closer you are to the statistical mortality and the more the insurance company will charge you.

So maybe, just maybe its not a bad idea to buy some base level of coverage while you are younger to lock in a lower lifetime rate and then as you get older and take on more financial obligations to get more coverage for the period of time needed.  That’s what I have, is a base level of whole life coverage (fully paid for years ago) and then term insurance on top of that for a period of time.

Some kinds of insurance has other benefits to offer such as adding on long term care coverage or overfunding to build up a cash balance to draw on in future years.

Those go beyond this article but certainly topics to discuss as part of your research.

If you are not sure if you have an adequate level of coverage for your needs or wondering if the policy you have now meets your current and upcoming needs, let’s set up a call to discuss these as part of your overall financial planning picture.

The information in this and other articles is intended to be educational in nature only.  Not tax, legal or investment guidance for you specifically.  Each person’s situation is unique and you must seek appropriate professional guidance that can address your unique situation.