What I wish everyone understood and acted on regarding family income protection.
By Bill Boersma
This is about as far away from “my market” as you can get, but on occasion I get a request to work with young couples regarding life insurance. In general, it’s a client’s or an advisor’s kids or a young professional I’ve been referred to.
Usually it’s something like this; they’re in their twenties or thirties and have two or three young children. They realize they should have life insurance and don’t know where to start. More often than not, one of the parents is staying home with the children.
It’s great that they’re having the conversation now, but… the kids are 4, 6 and 8 and for years they’ve been who knows how close to twisting in the wind with nothing.
Yes, I realize life is busy and things can easily get away from you. I’ve been there. But the “hardship” of dealing with this would look like a picnic on a summer day compared to one of them dropping dead with no life insurance.
What I see over and over
Invariably, they don’t relish the idea of calling an agent because of the stereotypical characterization of life insurance agents. Are they going to be pushed into buying a modest cash value policy rather than the much larger term insurance policy they really need?
Next, they have no idea just how cheap term insurance is. It’s not uncommon for me to provide numbers and for them to then ask if that’s a monthly or annual premium. It’s annual and they’re incredulous.
They have no idea how to compare products. In fact, it’s functionally impossible for them to do so. Trying to compare contractual features is a fool’s errand. However, today, more than ever, it’s important due to the games too many carriers are playing.
The cost
“For less than the cost of a cup of coffee a day…” is the infamous NPR fundraiser line. For the cost of an average cup of a Starbucks coffee drink a day ($5), a heathy 30-year-old guy could buy:
$6.64 million of 10 year term
$4.00 million of 20 year term
$2.75 million of 30 year term
For a 30-year-old healthy woman the numbers are $8.65 million, $5.3 million and $3.12 million, respectively. Cut that in half for a small cup of their black coffee.
I’m serious. A million bucks of 20-year term on this couple runs about $350 for her and $450 for him. How do you imagine that compares to whatever else they’re spending money on?
How much coverage?
They also usually don’t have a sense for how much they need. Yes, it’s a cliché for the agent to say they should get more, but they usually should. If you’re paying $400 for something, is paying $800 for enough really out of bounds?
I’m often asked for a rule of thumb. All I say is a million dollars isn’t a million dollars, it’s $50,000/year of income. That usually gets them on track. When the income earner is making $150,000 and the family is living off $100,000, the $500,000 term policy just isn’t going to cut it. Will it keep them from losing the house? Yes. Make the transition easier? Sure. But the survivor is going back to work and maybe they didn’t really want to do that at this stage in life.
These came up when I googled looking for picture. (Yes, they’re all widows because statistically, it’s more likely.)
It’s not going to eliminate the sadness, and you still lost your spouse, but there’s one sure fire way to make things a little better. Introduce a couple million bucks. Those dollar bills are amazing at making you feel like you’re going to make it. They let you focus on what’s most important at that moment.
You don’t have to be alone. You can have a nanny, a gardener, a personal shopper, you name it. Then you don’t have to spend all your time doing those things and can go out with your friends when you want to. (This may be somewhat tongue-in-cheek, but…)
Term vs Perm
I ran across one of those silly Buzzfeed pieces recently that was listing some things people would “Die on this hill” for. Here’s one from me: “Sell young people oodles of cheap term rather than less permanent insurance.” This isn’t the traditional training in the industry. Despite the flowery rhetoric of the ads, not every insurance company and agent action is in the best interest of the clients. My experience in life insurance litigation support allows me to state this with confidence.
Tons of term insurance trumps less permanent insurance all day long. No young person looking to use insurance to protect their family should consider any permanent insurance until the necessary amount is already covered by term, unless they can afford enough permanent insurance to truly cover the need.
Life insurance on kids
Here’s a hotly contested topic. Is insurance on kids a good idea? I wasn’t a fan until I had kids. That’s when I realized the insurance wasn’t for the parents, it’s for the kids. The $100,000 policies on my kids from when they were very young are now about a quarter million of death benefit now that they’re in their twenties.
If they grew up and proved to be uninsurable, at least they have that much protection for their families. Also, the policies have multiple future purchase options that can be triggered to increase the death benefit, if necessary. It may sound like a scare tactic, but it’s not. You may be surprised at how many children grow up to be uninsurable or only insurable at elevated rates.
Fortunately, the kids were all insurable in their teens when we added $500,000 30-year term policies as soon as they were eligible. (Term insurance isn’t available on young children.)
Remember the non-earner
Don’t for a moment forget the non-earning spouse. My wife stayed home with the kids, but I took out a few million in coverage on her. It didn’t take a lot to understand how much it would cost me to replace everything she did, let alone that I’d likely work fewer hours and may take summers off. That nanny wouldn’t be cheap either. None of that would be mandatory, but it would be possible with the extra money.
The alternative
I’d like to present this scene as more attractive. “Sure dad, we miss ya, but we’re gonna make it.”
This isn’t about chauvinism or materialism, and certainly not suggesting any inability regarding the surviving spouse. It’s about being responsible and protecting your family. Given the choice, who wouldn’t opt for the financial safety net?
Bill Boersma is a CLU, AEP and LIC and the founder and owner of OC Consulting Group. More information can be found at www.OC-LIC.com, www.BillBoersmaOnLifeInsurance.info or email at bill@oc-lic.com or call at 616-456-1000.
