Saturday, 23 March 2019

How much life insurance do you really need?

I have heard financial “experts” in the media say things like:

“Buy life insurance equal to three times your annual salary.”

“Never buy whole life insurance. Always buy term life insurance.”

“All life insurance is a rip-off.”

These are what I call “one-size-fits-all financial planning rules,” and I don’t believe in them — nor should you.

Suppose a doctor sees three patients in his waiting room. One has a broken leg. Another has a sinus headache. One poor fella’ is hearing voices that tell him to run up and down Town Commons banging on a cowbell singing “Don’t Fear the Reaper.”

The doctor’s solution is to walk into the waiting room, hand everyone two aspirins, and then head to the golf course. Would you trust a doctor like that? A doctor who provides one treatment regardless of the condition? I hope not.

At best they are ineffective, and at worse, they are dangerous.

Your financial health is entirely too important, so I strongly advise against using the services of any financial planner or advisor who takes a similar approach. Good financial health comes from identifying goals and challenges, then selecting the right techniques and tools for achieving your personal goals.

When you buy life insurance, there are two key decisions to make. One is how much coverage you need. There is no simple rule of thumb that’s based solely on age or income alone that is reliable in all circumstances.

If you make $250,000 a year, the amount of insurance you need will be very different if you’re 40 and single versus if you’re 25 and married with four children. It will also be quite different if you have a special-needs child who will need lifetime care versus one that is not.

The other decision is what type to buy. I absolutely will not say “term life is best” or “term life should never be purchased,” because then I would be dispensing one-size-fits-all financial planning advice! Different types of life insurance are designed to meet different needs and financial goals. What works for me may not work for you.

So how do you decide which type of life insurance to buy? Just like a medical check-up should consist of a doctor examining all aspects of your health, so should a financial planner analyze all aspects of your personal situation as it pertains to finance.

Just to name a few things you might want to talk about: age, marital status, family status, occupation, goals for the future, health status and level of job security.

Choosing the right kind and amount of life insurance is too important to be left up to someone who does not want to know why you are buying it in the first place.

What I would look for, more than anything, is someone who wants to talk to me about all of the issues described above, and, who will then make a personalized recommendation tailored just for me.

So, the next time you meet a so-called “expert” who dispenses one-size-fits-all advice on purchasing life insurance, my suggestion is that you run away. Quickly. Then, find someone who takes the time to give you a real financial health “check-up.”

Brenda Wells is the Robert F. Bird Distinguished Professor of Risk and Insurance at East Carolina University, as well as the director of the ECU Risk Management and Insurance Program. For information about the program or about the content of this article, contact her at [email protected] or at 481-2777.


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