The Mistake Many Will Never Know They Made

This article is for my children, nieces and nephews, all of who are now having their own children and who don't realize they should be asking Uncle Bob how much life insurance they need.

Many people die without realizing that they had too little life insurance. Of course that's something that will not bother them, assuming they died suddenly. Unfortunately it is their dependents (usually their young family) who will discover all too soon that, in addition to their emotional loss, their financial situation has taken a turn for the worst.

A number of years ago (over a quarter of a century) I participated in a CBC Marketplace segment on life insurance. An enterprising person who kept a copy of that segment has posted it on YouTube. You can go to www.youtube.com and search: “CBC Marketplace Whole Life.” You'll know you’ve found the right video if it is 9:37 long. It's a good video to watch, although it's a videotape copy of a videotape and is very grainy. I show up at about 7:45, driving our old Chevy station wagon that I should have washed before taping. Unfortunately I had no idea I would be sitting in that car doing the interview.

The story was originally going to be about "buy term; invest the difference" but I was able to talk the producer out of that angle. I told her that the whole-life sellers (that's the group in the industry who think everyone should have whole life) knew exactly how to deal with that argument and the show wouldn't have much impact.

My advice was to find some young widows who had recently lost their husbands and investigate how much life insurance they had, and how their financial situation was impacted after the death of the breadwinners.

To my surprise, they found two young widows who were a perfect fit. Unfortunately it was and remains too common a sad story. The CBC went on to assemble a great story on the subject and one of the best stories that I have ever seen in over 30 years of being in the life insurance business.

A.L. Williams (now Primerica Life) liked the story so much that they took a taped copy of it and distributed it to their agents throughout North America. That explains how the enterprising individual who put it on YouTube probably got it and why it is so grainy.

Not having enough life insurance is a common problem out there. Of course that’s not really a problem unless you die. At that point your dependents will discover your mistake and you won't know about it.

So how much life insurance is enough? It's a much easier calculation than many in the industry will admit. Your value to your family is the money that you earn: your pay cheque. If you die your family loses your pay cheque. Where will they get another pay cheque? If you have enough life insurance, the answer is that this money will come from the money you left and what it can produce annually if invested.

If you go to my web site www.term4sale.ca, then scroll to the bottom of the page, you will find a box called "Calculators". The first is called: How much life insurance do I need?

That calculator asks four basic questions, in addition to the information necessary to do a life insurance quote:

Income Required by Dependents
Number of Years Income Required
Inflation Rate
Interest Rate

From those numbers, the system will calculate the lump sum amount of money to do the job, and then show you how it is then used year by year to pay your family an income from the lump sum. In the last year the money is wiped out.

That, in a nutshell is the TOTAL life insurance that I think you need.

Clearly the numbers can be fine-tuned, but I generally find agents engaging in a lot of fine-tuning are "majoring in the minors." If you need $1,000,000 of life insurance, no one should care how much your funeral costs; it won't be $100,000.

Who cares if your mortgage isn't paid off? Your family made mortgage payments from your income; your family can keep doing that based upon the income replacement calculation. Don't get sidetracked from the real problem: your dead pay cheque.

Using this same logic how much life insurance do you NEED after you retire? NOTHING. Not a dime. During retirement (meaning you are not working and earning money) you are living off your assets, the money you saved. If you die, your spouse gets the assets. After careful study and reflection, I have determined that one person can live as cheaply as two. While a funeral will cost money, you don't have to be fed and clothed so your family will be financially ahead.

Incidentally, that's why I don't like to see much money spent on life insurance for children. It’s the same problem: they are not financial assets; they earn no income that you depend upon.

Now it's true that there are estate issues that can be solved with whole life insurance, but let's all freely admit that is NOT a "need" it is a "want." If you own no whole life insurance and die in retirement, your assets can be sold, your unpaid bills paid and the rest (after taxes) distributed to the beneficiaries of your estate.

Having said that, there may be some assets that get sold in a hurry for a lot less than they are worth. We've all heard about the estate auctions where someone paid $100 for something worth $2,500. That happens if liquidation is done too quickly so you may "want" whole life insurance to pay some of those unpaid bills or to buy your family some time to liquidate for maximum value.

Having said that you don't NEED it. And if there is sufficient cash set aside for a rainy day then whole life insurance may be redundant.

To summarize, a "need" for life insurance happens when someone is going to go hungry because you messed up and didn't replace your pay cheque, when you had a young family that depended on it. It’s not a permanent problem so buy term life insurance.

I will end by saying that there are some people who are going to find out that they have made this mistake before they die, and unfortunately can't do anything about it. I am speaking of those who become gravely ill and have time to contemplate their coming death. Those will most likely realize the jam that they are leaving their family in, but are in no position to buy life insurance because they are too ill do so. Life insurance companies do not insure burning buildings, which is why, when you buy term, you want to buy a level term plan that will guarantee you premium for as long as you need it, typically to about age 65.

Bob Barney, President, Compulife Software Inc., Kitchener, ON (888) 798-3488, barneyrl@compulife.com