Life insurance agents will tell you that almost everyone needs life insurance. Really?
One of the things that is great about operating as a fee-only financial planner is that we talk about life insurance but don’t sell it. Most people have never gotten any advice on insurance from someone who isn’t selling it. In this episode Bridget talks life insurance with someone who no longer sells it—John!
We talk about when you need life insurance and when it’s optional.
There’s one big transition—when you have children—where almost everyone needs life insurance. However, at other points in your life, it’s more optional. We talk about how to balance life insurance with other items in your budget.
TRANSCRIPT
Bridget: Life insurance. Who needs it? Do you need it? Find out today on Friends Talk Financial Planning. 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.
Bridget: John, I'm really excited that you're willing to talk about this today because you've got decades of experience in the financial planning and insurance industries. And so, you're drawing on more experience than most people ever have with life insurance. So I'm wondering, what do you tell people? who needs life insurance?
John: Yeah, that's a great question to start with. I want to take just one minute and point out that, not too often do you hear “I'm excited to talk about life insurance.” [laughter] I want to point that out that this is going to be an exciting episode here, but it's a great question. People think certainly the insurance agents, everybody needs to have life insurance. Why don't you have any life insurance? Get more! Right? And before we even get into the idea of well how much do you need and how do you buy it? Well listen, do you need it in the first place? That's a really important question.
And so what I tell people is I just sort of boil it down; there's two types of people that need to have insurance. And it’s if you love somebody or if you owe somebody, those are the two places. And so what that means, what that kind of pithy saying means to me is if you love somebody, “I've got a family” is in their response, “they're relying on my income to live.” So typically it's a couple or a person that has children, they need you to rely on. Or if there's a stay at home spouse and one person working right, you need to protect that person's income. So that's the “if you love somebody” part, meaning that if they're relying on your income; and then the other one is if you owe somebody. And that means typically, if you have, for many people it's the mortgage, or other things where listen, if something bad happens to me, I want to have that debt paid off. Or maybe they want to have that debt paid off, so they require me to have insurance. So those are the two places.
And of course, there's more details when it comes down to those things. But that's really at the end of the day, it’s if you love somebody or owe somebody, you probably need to have life insurance.
Bridget: That's a real pithy, interesting take. I'm interested in the…so it seems to me that people when they have kids a lot of times in the whole excitement of having kids, they miss this important detail, that they, that before this they might not have needed life insurance at all. Not that they didn't love their spouse. They loved their spouse, but their spouse would've been fine without, you know, financially without them. But then the child was born or adopted and then it goes from, it goes into, like, a pretty strong need category.
John: The need. That's exactly it. And if you think about it, if you’re say married or have a partner and no children, if both people are working, you say, “well listen, if I'm not around, I'm not costing money” right? And so my partner can continue to work and have her income, so it becomes that love thing is not okay. That's a funny way to think about it, right. But it’s “is somebody else relying on my income to make their life” right? and so you might have a situation with no kids involved, and one person, she's a physician making a high income, he's a teacher making a lower income…
Bridget: Right.
John: Something happens, and she's in a car accident…boy, he might have a hard time keeping the house, right.
Bridget: Right.
John: Oh yeah, we're both in. As opposed to if both people are school teachers or something like this, where we can live on our own income. So there are some nuances when it comes to that. I need to think about as with all the things we talk about, there are some guidelines, some ways to think about things, but it also is specific on your situation.
Bridget: Well, it's really interesting, yeah, because we get into that…so parents with kids that are dependent on them. I would say almost 100% of the time, I would tell them they need life insurance.
John: Almost without question. I can’t imagine a scenario, right?
Bridget: Yeah, very rare cases where I would say they don't. Then we get into okay, for me, I look at it as like, discretionary. This is getting compared to other household expenses. Like “yeah gee it would be nice if spouse A dies, the other would, you know, feel bereaved and get a bunch of money, and that would certainly help them. But it's not like they couldn't carry on.
Or the great example that you have, which I've got that example to, like, really uneven incomes. So the question of like, alright, what do you do about the house? And what do you do about this, like overall lifestyle that we've gotten to…you don't typically want the other person to just really have to downgrade just because, you know, one person dies. That's not what you're really going for. So, yeah that's another good example of where it's not the same as when you've got kids.
John: Yeah.
Bridget: But it's also not the same as like, okay, we're empty nesters, we’re both five years from retirement. But gee whiz, if one person died and the other got a bonus that would certainly make, that would cushion the nest, so that it's not like, yeah no nest. It's like a bird nest, yeah. If you don't want…you want to be able to add some cushioning, it’s not like the person is going to be left out in the cold.
John: Right. Taking care of that person. It kind of goes back to that idea of the love versus oh sort of thing. But one thing to keep in mind, I think when people talk about, “Hey, who needs insurance?” And sometimes we'll have folks and they say as an example “geez my house is all paid off already. So if I die, my spouse is taken care of and she can raise the kids or he's going to be fine on his own.” And one thing to keep in mind is that economically that might be true. But we're not talking about that, you know, your tree in the front yard fell down and you can replace it. Right?
Bridget: Right.
John: I mean, this is your life partner and the parent of your children. And there's more to it than just the economics also.
Bridget: Right. So it's a whammy for sure, it's a major setback if your spouse passes away. And the other thing is that I think that people can underplay how much work around that, how much work the spouse actually does. And you kind of need to replace that.
John: Yeah.
Bridget: So if the spouse is helping you raise kids, obviously you're going to need to replace that. But even if you've got a house and one person dies, if the person is pretty motivated, like, motivated to be keeping up the house, etc. Again, it gets to your point is, is the person who survives is going to be operating it? Probably less capacity, often, not always but often. And so money helps make up for that.
John: That emotional impact is not something to, it’s something to be factored in, right. A lot of people think about it “oh, here's the numbers” about that personal side of it, and maybe just to circle/close the loop on things and come to a conclusion. One group of people that doesn't need insurance are typically children. Or if you're single and don't have anybody that's responsible for you. That's the insurance agents…there's a case to be made for that, but it's really rare instances that it's a good idea to buy insurance on children just in general. That's one that we see in our practice quite a bit where it's not necessarily wrong, but there's usually other places that are better spots to put your money.
Bridget: You know, one other thing I've seen a lot is people without kids and without a house. And then the insurance agent will say “Yeah, but it's cheaper now than it will be later. You might not even be able to get it later.” What are your thoughts on that?
John: Yeah, there's something to be said, that's not wrong. However, in most cases, you take a look at we'll talk in a future episode on what to buy and how to do that. But buying it as a 25 year old or a 30 year old in anticipation of future events. That's not unreasonable. And we'll talk about that; but buying it as a parent on your baby or your young child to protect the future insurability, it just usually doesn't work out the way that it's promised.
Bridget: Right.
John: So from the instance, it sounds like a great idea, and it sounds like you want to be responsible, but you're better off usually spending that money on buying more insurance for you as a parent.
Bridget: Okay. Great. Thanks so much for all this great information John, and I just want to say two things at the end. First, both John and I are members of ACP or the Alliance of Comprehensive Planners, which is non-for-profit group of planners that operate all around the country. And so if you like how we approach things and you're interested, you can check out ACPlanner.org. The second thing is subscribe, subscribing to our YouTube channel helps us with YouTube credibility and helps other people find us.
John: Helps other people find us, that’s right.
Bridget: So great. With that, thanks John.
John: Alright, thanks Bridget.
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.