Having been a practitioner involved with life insurance over the past 28 years, I have unfortunately had to deliver my fair share of insurance checks. When I met people who have lost a loved one and now have to build them a financial plan, never once did I hear them say,
“Boy, I’m so angry my life insurance agent sold me too much insurance!”
Rather, I hear horror stories from widows who cannot understand why their husband didn’t take out more
life insurance. Or, they assured their spouse that they would be ‘well taken care of’ if anything happened to them. This is the story for many families across America.
In the last six months, I’ve seen both friends and family who are in the 40 to 45 year old range dealing with major medical issues. When people told me that the aches in my joints would be just a little bit worse in my 40s. . . well I hate to admit but they were correct. Recently, I had three different people I know who drove themselves down to the emergency room thinking that they might be having a stroke or heart attack. I know three different people who were diagnosed with some type of cancer that they are currently treating. I also know of two separate cases where friends found out they have diabetes. In your 20’s, you never really had to worry about this kind of stuff. In your 30’s you start to feel it a little bit here and there. But, in your 40’s is where you start to see some of the more major stuff.
When it comes to life insurance, most people use some magical rule of thumb like buying 2 to 3 times their salary. Even worse, since insurance is not the most enjoyable financial planning topic, they come up with the notion that they will just pick up $250,000 or $500,000 and their partner will be alright if something should happen to them. I’m here to tell you that when it comes to life insurance, $1,000,000 just isn’t a lot of money.
First of all, at today’s guaranteed interest rates, $1,000,000 will barely generate $10,000 per year of income if you don’t want to touch principal. More realistically, it may only kick off $40,000 to $50,000 if you use a diversified bond portfolio. However, if you go that route there is no guarantee that your principal won’t fluctuate. Usually when someone passes away, liabilities have to be paid off. If $250,000 is left on the mortgage, credit card debt, final and funeral expenses, and potentially putting away for your kid’s college education, you can blow through $1,000,000 in a country minute.
And . . . here is one more thought for you. If you are 35 years old and buy $500,000 of life insurance for a 30 year term, about 20 years into that term (assuming inflation is 3%), the $500,000 will actually be only worth $250,000 in terms of real money. Nobody who buys life insurance thinks about the impact of inflation on their insurance proceeds.
And remember that $1,000,000 just isn’t a lot of money.
Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.
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