Our son Kingston will just turn 18 months in a week or so and I can look back on the past year and a half with pride for how he’s grown and developed, wonder for the miracle of life, and excitement for the years to come. I was there the moment we was born and at that moment, as the nurses were performing their post-delivery protocols, I remember hearing a nearly audible “click” in my subconscious.
That click I heard was my parental instincts of unconditional love and protection turning on. Here was this helpless, strange little creature and it's my duty for the next couple of decades and beyond to relegate my personal ambitions to raising this child to be a productive member of society.
Part of that responsibility is the assurance to provide financially for my family as best as I can, even if I’m not alive to earn a living. To meet part of that responsibility, my wife and I each purchased a 20-year term life policy while she was still pregnant.
Why buy while she was pregnant? Because surprisingly, it doesn’t really influence your premiums if you’re both healthy, and practically, because the child is still at risk financially (more so I would argue) if one or both of us perished.
In fact, it should be exactly the first task to perform once you discover you are expecting a child. That's when your responsibility as a parent actually begins.
Stop right now and think about the series of events that would occur immediately following your` death, were it to happen before the end of this day.
- Are your affairs completely in order?
- Are there funds to pay for your final expenses, as well as any expenses that occur surrounding your death? Where will that money come from?
- Can your spouse quickly and effectively take over your responsibilities, like paying the bills and taxes, without undue stress and anxiety?
- Where are your important documents and your passwords into your online accounts?
- Who do you want making important decisions in the emotionally-charged period following your death?
- Would you expect your spouse to return to work immediately because of the need to pay bills, or would do you think he/she would like the luxury of time for emotional recovery and decision-making?
- When he/she does return to work, how will they handle child care and the costs associated with being at work throughout the day?
- What about your plans for the child’s education, including private school and college?
- How will your and your spouse’s short and long-term goals be impacted?
- How will they fund their standard of living without your income or your ability to fulfill your responsibilities?
Essentially, how exactly will you pay for the things you intended to pay for with earnings you’re not around to earn?
It is a mental exercise well-worth the time and effort; and the conclusions you reach may be exactly the stimulus you need to make an immediate and dramatic improvement on the financial well-being of your family.
The point of the exercise is to realize it is our responsibility as parents to provide for the well-being of our children, even if we are not alive to fulfill that responsibility.
I hope by this point you feel both the advocacy and the urgency for which I argue in favor of being insured against the risk of death. Now, let’s visit the thought process behind actually getting properly insured.
Buy a term policy. Term policies are designed to insure against temporary risks for the time period that risk is expected to exist and for the amount that risk can practicably be calculated to be. My wife and I bought a 20-year term policy before my son’s birth because I expect when he’s twenty years old to be reasonably self-sufficient.
How much do I need?
It depends, but probably more than you think. There should be three main parts of the calculation to determine your life insurance need.
- Pay off your debts, especially your student loan and personal debts. Whether you pay off your mortgage or not should depend on your mortgage rate and if your surviving spouse prefers not to have the payment in the future.
- Replenish your emergency account. Unexpected deaths have the tendency to be expensive, especially for young people. Part of the insurance should be to handle short and intermediate term financial liabilities and fund the period immediately after the event.
- Fund the portion of your long-term goals you expected to save over that period of time. This includes education and retirement savings, as well as replacing the income you expected to make to fund those goals and your lifestyle. This can be more difficult to determine if you don’t have a comprehensive financial plan to calculate your anticipated spending both pre- and post-retirement.
What about insurance through my employer?
That’s a great start, but you can’t guarantee you’ll be at your employer for the rest of your career. Also, it’s probably not going to be enough to provide the protection you need. Also, it’s rare for a person’s health to improve drastically over the course of their lives and there’s a chance you may not qualify for the policy you need if your health does change for the worse.
How much does it cost?
The advantage of term life insurance is it’s relatively cheap if you’re young and healthy. My wife and I are both nonsmokers in good health. Our policies have combined face values in excess of $2.5MM and pay about $100 a month. For my peace of mind and mental well-being that comes with knowing Kingston is taken care of if something happens to me or my wife, that’s a bargain. The point is, the cost of the policy is probably not an excuse if you’re underinsured.
Term insurance has become a commodity, which means policies are fairly uniform in cost and construction across the industry. Figure out how much you need and for how long you need it. Then shop around to buy the cheapest policy from the largest company whose name you recognize. An agent can help, but you should already have a precise idea of what you’re looking for before you approach them. Otherwise, you’re at risk of being sold unnecessary riders in order to boost the agent’s commission.
In my experience, permanent policies such as whole life or universal life policies are rarely if ever the prudent means to provide this form of risk protection. They are simply too expensive in comparison, provide insufficient protection for cost, and the agents are too well compensated by the commissions from selling such policies. In my opinion, life insurance is not an accumulation vehicle to save for long-term goals because of the internal expenses and fees paid by customers over the life of the policy.
You may still have lingering doubts, for some reason. You may even be using one of the following excuses, to which I offer the corresponding, brutally honest rejoinder:
- I have other family members that will chip in. It should be your extended family’s choice to provide for your child, not their responsibility. Have you considered the impact that might that have on their lives and finances?
- My spouse can always remarry. Why make that obligatory for their financial survival? You trust your spouse to raise your children according to values you both share. Can you confidently expect some random stranger to do the same in your place?
- It's too morbid, I don't want to think about it. If the possibility of your own demise doesn't spurn you into action, how about the possibility of your surviving family becoming impoverished because of your lack of emotional resilience?
- I don’t believe in insurance, it’s a scam. It doesn’t matter what you believe, only what the consequences of your beliefs, good or bad, may be on people for whom you care. Life insurance is an effective method of managing a potentially devastating risk to your family at a reasonable cost. You're buying protection, not assisting a Nigerian prince with his urgent money issues.
- The insurance company might go bankrupt and I’ll have wasted all that money I paid for premiums. Realistically, this simply won’t happen (though there certainly are no guarantees). Should an insurance company be unable to pay it’s claims, other companies in the industry will come together to cover those costs in order to preserve the perception of solvency across the industry. They will gladly purchase the contracts from the failing company as a form of goodwill marketing.
- If I buy insurance, my spouse might feel inclined to speed up the collection of the death benefit. I can't actually help you there.
And if you think I’m advocating your purchasing life insurance because you cynically believe I’m trying to boost my own commission sales, think again. I’m not paid by commissions and I am a fiduciary, which means instead of selling you a policy to earn a commission, I’m advising you to protect your family because it’s in your best interests, client of mine or not.
So, considering the fact that I won’t be compensated for the insurance I’m enthusiastically encouraging you to buy should be a very compelling reason for you to buy that insurance. It’s that important.
In summary, money will never replace your value and positive influence as a parent. Your presence in your children’s lives is inarguably irreplaceable and greatly improves their chances of success in life. However, should the unthinkable occur, a large enough influx of cash can dramatically reduce the emotional and financial turmoil faced by the survivors. A properly constructed term life policy is an effective and inexpensive way to provide that cash when it’s needed most.