What's the biggest financial mistake that parents make when having a child? That's the topic of this video.
We won't be coy here: it's not buying life insurance or not having enough of it. And, no, we don't have any life insurance to sell. We just have personal experience with parents who did and didn't buy life insurance.
We talk about how much to buy, what type to buy, then share our personal experience.
We'll also cover how much life insurance to buy, what type to buy, and other details of making the decision.
For the grandparents out there, this is a big tip that you can help your kids with. When having a child, many people are overwhelmed with things to do. They don't like thinking about dying, or enjoy the task of purchasing life insurance. Maybe they don't know anyone who has died. They're not even conscious that they're making a big financial error. They don't understand the risk.
But as grandparents, even if you didn't have life insurance when your kids were young, surely you understand that people die. You have enough life experience to coach your kids to avoid this big mistake. It's not expensive.
You don't want to be in the position of being the grandparent with struggling grandkids. This video gives you the information to act.
Here's another video we've done on how much life insurance to buy and if you should just depend on what you get through work: https://youtu.be/ZoK55YZlwqw
Here's Bridget's firm website: https://www.sullivanmermel.com
John's firm website: https://www.trinfin.com
For advisors around the US: https://www.acplanners.org/home
Thanks for watching and please subscribe!
TRANSCRIPT
Bridget: Are you expecting a child or grandchild? On this episode, we'll be talking about how to avoid the biggest financial mistake that people make when they're having a baby. Hi, I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I have a fee-only financial planning practice in Middleton, Wisconsin. And before we get into solving the biggest financial planning mistake new parents make, I want to remind viewers to hit the subscribe button. That helps other people find this information on YouTube. So hit subscribe and then let's talk about that biggest financial mistake that young parents make. And I really love that in the introduction, Bridget, you said it's young parents, but then it's also as a grandparent. Right. How do you help? There's so many things going on if your child is having a baby. And maybe these are some of the things that you can be a little clearer headed or pragmatic about and helping to think about these things.
Bridget: Right. And the biggest thing really is buying life insurance. So I am not a life insurance salesman, and I've never been a life insurance salesman. But when you're having a child, that's the time you really need it. When your kids are growing up, that's when you need life insurance. So we generally recommend term life insurance.
John: Yeah. I'm not a life insurance salesman, but I used to be. Right. So I'm getting better, though. It's been a long time. And it's one of these things, as we're saying this, I'm thinking this is the least sexy financial planning idea. Maybe. But it's one of those necessities. Right. And so as we're thinking about these things, it really is making sure that there's enough insurance to cover if something tragic happens. And we'll talk about some of the details, I think. Right. Like making sure you get enough. Making sure you buy term insurance. It's cheap. One of the things I always tell people is—and, listen, I'm a big proponent of only having as much insurance as you need, like not over insuring—but I'll tell people, a million dollars is a lot of money if you win in the lottery, right? Absolutely. That'd be fantastic. It's not a lot of money if you have to raise a child for the next 20 years on your own without your life partner. It's a very different feeling on things.
It just popped into my head that I was talking with my brother, actually, about how much insurance does a person need? And geez, he said something along the lines, “I’m worth more dead than I am alive,” that sort of a thing. I hear that from a lot of different folks. And I said, well, think about just a real basic math. I said, “Okay, how much insurance do you have?” And he told me. I said, “How much do you make?” Okay. He's in his early 40s. All right. You got 20 more years to work. So multiply your annual salary times 20. Oh, yeah. You're worth a heck of a lot more alive without even factoring in all the other things.
And one of the things that I really appreciate about our conversations, Bridget, is that you always bring in the personal side of things. And I'm kind of what is it, left brain, the numbers. Here's the math on this. We need to talk about this. But part of the thing that really resonates with me is it's not just about, well, how can I replace my salary? How can I replace my spouse taking care of the kids? Listen, this is an emotional big to somebody who has a crazy cancer or gets hit by a truck. I mean, this is a big deal. It's not just a numbers thing. Right. It's a life changing event also, in addition to that.
Bridget: Right. And I've got clients who I've seen this play out. But I know you've got a personal story. I was hoping you would share it with us.
John: Sure.
Bridget: About someone who has life insurance versus somebody who doesn't have life insurance. And then, unfortunately…
John: Yeah, it's a family thing. And again, my sort of numbers thinking. The example is my grandparents versus my wife's grandparents, my in-law’s grandparents. By coincidence, both of our grandfathers were welders in Milwaukee back in the 30s, 40s, 50s sort of thing. And back in those days, that was a great occupation and financially rewarding sort of thing. My mom would talk about new cars every couple of years. My grandparents bought their house in cash. My grandmother never had a debt, even when credit cards came into being. That was sort of her thing.
And same thing with my wife's grandparents. Sort of a great position in life. My grandfather died when my mom was 13 years old. And so it's 1957 and my mom was an only child, so she and my grandmother were my grandmother in her 40s is a widow. And back then for a single mother trying to raise such a child, getting a job and doing things when she didn't have a college education, that was a tough stretch of things.
And after we got married, I took a look at my in-laws, my grandparent in-laws. They lived a very long life, full career and income and the amount of resources that they had into their seventy’s and eighty’s. My grandmother was living on Social Security and I never thought twice about it growing up, of course. But you know, as I got to be adult I thought, “Well, geez, Grandpa had enough life insurance to cover some of these things.” That struggle that my grandmother had from a financial standpoint. And it was just this contrast to “Geez, if Grandpa had worked for another 25 years as a welder, what he would have had,” because I could see what my in-laws had and what happened with my grandmother and what she didn't have.
Again, this is my financial side of things. Just on the money side, you go, “Holy, man, that is a big difference” in two things that just sort of run parallel and took different tracks. So that's where I tell people, listen, buy a lot of life insurance, buy it cheaply, buy the term stuff. But you probably need more than what you feel like you need. And that's part of where I get that philosophy from.
Bridget: Yeah. And I had a client who I had been working with for quite a while, and they did buy a whole bunch of life insurance. Lots. And I was happy, especially when they came down with pancreatic cancer at 42. It was like, “Well, this is one thing I don't have to worry about.” That's the way the client felt. It's like “This is one thing I'm not worried about: that if the worst thing happens to me, my spouse is going to have a problem raising the kids financially.” As a planner, I couldn't describe how happy I was about that particular decision making. I mean, I wasn't happy about the situation, but I was very happy about that decision making.
John: So many other things to worry about putting yourself and trying to picture myself in that spot and then have to think about, is my family going to be okay financially? Right. That's off the table. And we can do these other things.
Bridget: And one of the things that we really try to help people with is don't make big mistakes. Yeah, right. We want things to go generally right. And there's a lot of things in finances that you can't control. We can't control how well the market does. We don't control what the interest rates are. We don't control what inflation is. But, we can control whether or not we have life insurance. And that just buffets you against a major problem. And again, this doesn't have to be for everybody. The people who really need it are parents with young kids.
John: That's right.
Bridget: Especially with young kids. High schoolers, too, but especially young because, like you described, the number of years that the person's going to be alive while the one parent is gone is longer when the kids are young.
John: That's right. Maybe this is a good time to segue into talking about some nuts and bolts of, okay, “Hey, we need to do this.” How much? And there's an analysis that you can run on various online things, talk to an insurance agent. We say to people, “Listen, sometimes somewhere around eight to twelve times your annual income is probably a reasonable place.” It doesn't apply to everybody, like any rule of thumb, but that's a good way to think about, like, “Okay, if I've got less than eight times, I bet I need more.” And “Geez, if I got more than twelve times, and maybe it's five to 15…” but something in that range. Ten times income plus or minus some factor is a reasonable place. At least for us, we see a lot of people and they've got coverage through work, which is great because it's cheap, but it's one times salary or two times salary and we're talking five or ten or 15 times salary.
Bridget: And we did an entire episode on that particular topic. The other thing is that we also recommend that even if one spouse is making less—so one spouse is making more and the other spouse is making less or not working at all—you want insurance on both people because, to replace the person that's not working or is making less, that still takes a lot of money. The person who, the surviving spouse, has a lot on their plate and again, it's just another thing to worry about. Also, their emotional capacity is probably shrinking, right?
John: I think that last one is a really big one for me. You have one spouse that's a doctor or an attorney, or whatever it is, and then there's a stay-at-home spouse. There is a reason why families choose to have a stay-at-home spouse, generally speaking. That reason usually has to do with quality of life and family. And if the stay-at-home spouse is the one that gets pancreatic cancer, does that person that's out working for 40 or 50 or 60 hours a week, are they going to continue at that pace? Or is it a value of theirs to have the choice, right?
Having enough insurance on the stay-at-home spouse house gives you the choice of continuing to work if you want to or taking some time off and doing less, right? So that's one factor there.
The other big thing is just buying term insurance. We don't need to get into all the details on that. But insurance agents often love to sell whole-life or cash-value insurance because the commissions are higher, the dollars are higher. This term insurance is the cheapest way to do it. And that gets you the most bang for your buck from a coverage standpoint. It doesn't have to be expensive and you make sure you get enough coverage.
Those are the two things that I think are big takeaways, again for the young parents watching or for the young grandparents. Right. What things that you can think about. As I look at it, I know a lot of people come in and they're in that 50 to 70-year-old range. Their kids are grown. And, geez, they didn't have enough insurance.
Maybe some viewers were in that spot where they look back and go, “Hey, it worked out okay.” But you take a look at some of these stories we talk about, and it's maybe a small risk, but the consequences are really huge with it. Right. And so this is something that maybe even if you look back at this and you didn't do this in your younger years with your family, this is a gift you can give to your kids and grandkids by helping them to be set up with enough life insurance.
Bridget: Great. So with that, let's wrap it up. I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I run a fee-only financial planning practice in Middleton, Wisconsin. And if you like what you hear on Friends Talk Financial Planning, both Bridget and I are members of the Alliance of Comprehensive Planners (ACP). ACP is a group of fee-only tax focused financial planners across the country. And you can go to acplanners.org to find an adviser in your area.
Bridget: And please subscribe. It helps us with the YouTube algorithm. And with that, we'll see you soon. Thanks.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.