What's Your Life Worth?
I hate hearing stories about people dying young like Chadwick Boseman, John Candy, Gilda Radner, Pat Tilman, or Kobe Bryant. I could list hundreds of people who died early, including close friends and relatives. Of course, we will all die at some point, hopefully after a long, healthy life.
A common knock on financial planners is that we only want to sell life insurance. There might be some truth to the complaint, but why is it true? One reason planners recommend insurance solutions is because you probably need them, and insurance can turn a horrible situation into a better one. You likely own fire or car insurance, and, hopefully, you never have to use it. You might even insure a TV, computer, or iPhone. If we are quick to insure material things, why not our most valuable asset – ourselves?
In addition to life insurance, owning disability and long-term care insurance can protect your assets for generations. I consider these insurance policies the big three of estate planning.
Life insurance is a must if you have a family with young children or own a home with a mortgage. Dying is hard, but dying without assets or life insurance to care for your loved ones is even more complicated. Insurance may appear expensive, but it's cheap relative to the benefit it will provide to those you leave behind.
How much life insurance do you need? At a minimum, you need enough coverage to pay off all your debts. If you're married, providing financial support for your spouse is recommended. If you have children, then paying for their college with life insurance proceeds is recommended. Let's look at some numbers.
Let's say you're 30 years old, earning $100,000 per year, married with two kids age three and five, and you own a home with a mortgage balance of $250,000. If you die today, then you would need to provide support to your spouse for thirty-five years. Over a thirty-five-year career, you could earn more than $9 million in income, so the amount of life insurance required today is $1.6 million.
According to Money Guide Pro, the annual tuition for a four-year public college is $26,500, so paying for college for your children will cost $531,432,so the amount of insurance needed today is about $255,000.
If we add spousal income, college tuition, and debt, the amount of insurance you need today is $2.105 million. As your assets grow, your children leave the nest, and you eliminate your debt, then the need for life insurance diminishes significantly.
Should you insure a non-working spouse? Yes, of course. Your "non-working" spouse is probably working harder than you are as they raise children, shop for groceries, clean the house, etc. If your non-working spouse died today, you must replace all the services they provide, and it won't be cheap. Also, emotionally speaking, you might not want to return to work after losing the love of your life.
Disability agents are quick to tell you that you only die once, but you can become disabled multiple times. If you're working, disability insurance is a necessity. Disability insurance provides you and your family monthly income if you become incapacitated. According to Guardian Life, disability insurance costs between 1% to 3% of your annual salary and covers 60% to 80% of your salary. For example, if your income is $100,000, your projected premium costs about $1,000 to $3,000 per year, and your policy will provide an annual income of $60,000 to $80,000.
Long-Term Care Insurance
Long-term care insurance can protect your assets if you enter an assisted living facility or require home healthcare. According to Genworth Financial, the average monthly cost for assisted living last year was $4,300. However, your expenses can climb significantly, and it's not uncommon for payments to exceed $10,000 per month. According to Money Guide Pro, someone age fifty can expect to spend more than $750,000 for three years in a nursing home if they enter a facility at age 80.
If you own substantial assets, you can self-insure to care for your family after your gone. After calculating your insurance needs, you can determine if it makes more sense not to purchase commercial insurance and self-insure. However, for a few cents on the dollar, you can protect your family and your assets and transfer the liability to an insurance carrier.
Completing a financial plan can help you determine the exact amount of insurance you need to protect you and your family. Your plan will review your assets, goals, wishes, wants, and needs to assess your situation.
In addition to insurance, don't forget to create a family will or trust. Your estate documents will help distribute your assets according to your wishes. More importantly, the health care directives will allow your family to discuss your medical situation with your doctors while you're incapacitated.
Discussing your mortality with loved ones is not easy, but it's beneficial. Adding insurance to your investment and financial plan will bring peace and comfort to those you love.
Only the good die young. ~ Billy Joel
July 5, 2021
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM's custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren't suitable for every investor.
 https://www.seniorliving.org/assisted-living/costs/, May 27, 2021, Scott Witt and Jeff Hoyt