WRITTEN BY: Gideon Drucker, CFP® AIF® ECA
If you've been reading these blogs for a while...you know by now that Drucker Wealth specializes in building out comprehensive financial plans through our trademarked Financial Life Plan® process.
Every new client that starts working with us goes through this 4-6 week in depth process.
Your FLP is a full financial check up, assessment, and diagnosis complete with a full range of financial recommendations to implement.
These recommendations may take the form of:
- cutting back your discretionary spending to get your savings rate high enough to reach your housing goal,
- the need to open up a college savings account (& then how much/where you need to contribute) for your daughter,
- re-calibrating your investment mix inside your 401k to achieve your investment goals,
- or breaking down the way your recent income change will affect your likelihood of retiring early.
Honestly, the recommendations run the gamut....
This is to be expected when you consider we're building out a goal-based financial plan.
We're looking at your cash flow, investment outlook, insurance coordination, tax efficiency, and retirement benefits all together.
There is one gap in plans I see relentlessly and repeatedly from our planning clients.
Even those clients that are doing everything else right and have a 95%+ chance of long term plan success...
Here it goes: The one planning deficiency that consistently comes up with our young professional high income earning clients (30-49 years old and making north of $250k as a household) is...
They do not have enough term life insurance.
Now, before we go further...It is important to explain why I'm talking ONLY about TERM insurance here.
Permanent insurance which is sometimes called cash value insurance, the most common type of which is Whole Life Insurance, can be a great vehicle.
It combines life insurance that you will have for life with a savings component that you can access while you're alive to serve as another conservatives balance to your investments. There is a time and place for it. In fact, I own this type of insurance myself and so does everyone in my family. But that's not what I'm talking about here.
It's way too specific of a financial instrument to talk about in a general forum like this and I think it only actually makes sense in situations when people have great cash flow and have maxed out other retirement accounts, (Don't tell this to your insurance agent!! After all...if all you have is a hammer, everything looks like a "nail")
I am talking about Term life insurance...This type of life insurance, you are renting.
You pay an annual premium and you have the insurance for 10, 20, or 30 years. Each year the premium stays the same and if G-d forbid something were to happen to you then your beneficiary gets the death benefit payout. At the end of your chosen time period (which you elect when you start the insurance), your coverage will expire and you will have no more premium payments to make. (One caveat: throughout the life of your term policy, you have the ability to convert the coverage into the permanent type if you choose...something a lot of our clients elect to do so over time.)
I am confident in saying this: Most people we work with come to us with far too little term life insurance....if they have any at all!
(A quick note...I'm not counting the life insurance you have through your employer as part of your family's ongoing protection plan. It's great that you have it and 100% you should continue to elect to keep this coverage the next time enrollment opens up...Again, it's great...keep it! But ultimately, it's not a recipe for true family protection...as if/when you leave your job, you know longer have the coverage. What if you change jobs and they don't have life insurance coverage? What if you move to a start up? What if you took time of in the future or start your own business? There are too many variables to rely on it consistently over the next 20-30 years.
Let's look at it like this. Let's say you make $200k and your spouse makes $100k. Your household income = $300k.
How much life insurance should you have?
The questions you should be asking are:
- How much of your income do you want to replace if you passed away?
- How much of that $200k would your husband and kids need each year moving forward to pay the bills?
As an illustrative point, lets say you have a $2mm term 30 year policy when you pass away. Your spouse would receive $2mm tax free as the death benefit.
Suppose they come to us to help them figure out an investing game plan to turn that $2mm into a long term strategy for your family. $2mm earning a hypothetical 4% yield (meaning income that you can generate from this pot of money without liquidating any principle) would throw off approximately $80,000 per year for your spouse without dipping into the original $2mm*.
Why do we want to leave that $2mm alone? Simply put, because we need this money to last.
Especially if you are in your 30's and 40's!!
We don't just have to think about replacing income in your working years...
- but in retirement too...
- And paying for college tuition if you have young kids...
- or taking care of your elder family if they get sick... Or paying off the mortgage!
Think about this too...if your spouse passes away in the near term...you'd be losing out on another 20-30 years of SAVING for retirement in addition to their share of expenses.
Again, we want to generate enough income from the death benefit to live on NOW during your working years...while your kids are growing up (if you have kids), so that we can leave the principal ($2mm) to grow and support retirement, to pay off your mortgage, pay for college, or other large one off expenses
Here's the kicker and why I'm so relentless in telling my young clients they NEED to do a better job of covering themselves.
Term insurance is inexpensive!
You spend more each month on things that you don't even account for than you would for this type of insurance.
Of course, It depends on age/health (the younger and healthier you are when you apply for insurance the better the rates are) but for the purpose of illustrating our point,
$2mm of 30 Year Term insurance for a healthy 35 year old female would cost approximately $1,200 per year. PER YEAR. This is a rounding error in your spending habits....in order to protect your family!
A 35 year old making $200k+ annually should have at least $2mm of long term term insurance... and in many cases (if you have kids, elderly parents, supporting a spouse etc.) should consider more.
Sometimes my job in delivering Financial Life Plans to clients is telling them what they need to do and NOT what they want to do.
That, truly, is the best encapsulation of my fiduciary duty. This is one of them.
If you are making enough money where you can save $2g per month, or $5g per month, or $15g per month...and all of our clients fit somewhere in that range...then yes, you absolutely should be spending $1-4g per year to protect your family in case it all goes wrong over the next 30 years!
I hope you outlive the coverage and your family never needs to receive this money...It will still be the best and easiest financial decision you can make today.
Questions? Let's discuss over a 15 minute Right Fit call. Schedule time on my calendar and we can start the conversations around planning for your financial future!