In my first meeting with a new client, we typically do what I call a “data dump.” They bring all their financial information and dump it (sometimes literally) on my desk.
Right now, I’m thinking of a particular young couple. They owned a business and had two young children at home. They were busy folks!
After discussing their situation and goals, I said, “My first impression is that you first need to shore things up in the protection department.” The husband looked confused. “But we have some term and whole life insurance,” he said. “What more is there?”
He was asking a “product” question. He needed to be asking a “results” question.
I elaborated, “Here’s what I see: If either of you died or became disabled, the other spouse would face significant financial issues. You can remedy this with more insurance and some legal documents. It wouldn’t cost much. However, ignoring these matters could be very costly. Before we discuss investing and retirement, let’s focus on protection.”
Protection is always a smart place to start when creating a sound financial plan. I ask my clients this hypothetical: “If—God forbid—tragedy struck, but the next day you could still call your insurance company and say, ‘I want x amount of coverage,’ how much coverage would you try to get?”
Most think briefly and smile. “As much as I could.”
Right answer.
Obviously, insurance companies limit their coverage. You can’t get $1 million in homeowner’s coverage for a $10,000 shack in the woods. Insurance companies think in terms of “replacement value.”
But when it’s someone’s life, “replacement value” gets a little harder to quantify. After all, human life is priceless. So, insurance companies try to estimate “economic human life value.” That is, they calculate how much income a person is likely to produce over the remainder of their lives.
In the case of the young couple, if the 40-year-old husband was earning $100,000 annually, most life insurance companies would cover him for up to 25 times that amount, or $2.5 million. (That’s how much income his family would miss out on in the event of his sudden death).
That sounds like a lot, but no one would be getting rich there. This amount would simply allow the family to continue living the same lifestyle as before. In most cases, that insurance money would be long gone by retirement age.
It’s the same when people become disabled. They are physically alive, but economically “dead.” That is, they can’t work or earn.
For them, the solution isn’t a lump sum of money. It’s a regular stream of income, payable to the disabled person. We call this “disability income insurance.” Sadly, it’s one of the most underutilized, yet vitally important forms of insurance available.
I often suggest to clients to imagine two job offers. One comes with an $80,000 salary but no benefits. The other offers a $75,000 income and two important benefits—life insurance and disability insurance. If the worker at this second job dies, her spouse gets $1.5 million in death benefit. And if she is disabled, she gets $50,000 in annual, tax-free income for as long as she is unable to work.
Not everyone picks the second job (the one with the benefits), but most do. I say they’re wise to do so.
When it comes to financial planning, start with protection. And when it comes to protection, don’t begin with “product: questions. Start with “results” questions, like this one: How protected do I want to be?
Have other questions about protection or creating a wise financial plan? I’ve got a free e-book I just wrote. It’s titled “The Three Financial Questions You Should Be Asking for 2021,” and I’d love to send it to you. Email me at bmoore@argentadvisors.com, and I’ll get it to you right away.
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