I spoke with you a couple weeks ago on the philosophy of a certain radio personality, who espouses the notion that you and I don’t need term life insurance, or any life insurance for that matter, beyond a certain arbitrary age or time. ( let’s say 65 )
I noted that, by his own admission his very bright wife disagrees with his philosophy, insisting
although he insists he doesn’t “need” any term life insurance, that he carry it for her peace of mind. Smart Lady!
I call him a personality and not an advisor, because he has chosen to hold no technical or advisory licenses in the field. Nonetheless, he is someone who I believe is sincere in his desire to help others create peace of mind through financial stewardship, debt reduction strategies, living beneath one’s means, etc. On those points we basically agree. Beyond those points, however, we part ways.
ONE
He encourages his listeners to invest their life’s savings in the STOCK MARKET, based on the optimistic notion that the “average” investor will earn double-digit returns in the long haul by buying and holding what he refers to as high quality, dividend-paying mutual funds.
Have you ever met anyone who became wealthy by investing in the stock market?
Do you know anyone who can tolerate market losses, downturns, crashes, slumps – call them what you like – of 20, 30 or even 40% ??
Not to mention, I firmly believe that 90% of the American public has no business investing in risk unless they first secure 6-12 months’ income in safe savings.
(We can discuss the difference between Saving and Investment at another time)
TWO
He suggests that DEFERRED-TAX retirement plans, such as 401(k), 403(b) IRA and other such inducements are the very best wrapper or strategy to save for the future – notwithstanding the possibility or expectation, I would say the certainty, that taxes will increase in the future, potentially wiping out any hoped-for advantages.
Not to mention the advisor fees; inflation that will (not “may” but “WILL”) result in loss of purchasing power in coming years… etc, etc.
THREE
He suggests that paying cash for purchases somehow leads to some economic advantage beyond the absence of debt. This is admittedly a good thing but perhaps not the best thing, because there is never any advantage to paying cash unless you can recapture the lost opportunity cost of that cash. (More on this issue later)
FOUR
He suggests that you will no longer need any kind of life insurance in retirement, or Independence as I prefer to call it, and thus his counsel that term insurance during your working, earning, child-raising years, will be the only life insurance you will ever need.
I’ll devote the balance of this space to Item Four today, and look forward to sharing on the others in future writings. So here goes:
No Need for Life Insurance after Retirement (Let’s call it age 65 for now)
Let’s look at two distinct periods of time, for ease of conversation:
A. Pre-65. Pre-retirement. Your earning years. The building years.
B. Post-65. Retirement. Your golden years. Nothing to do but fish, golf, travel, enjoy the fruits, yada, yada. Oh yes…. also known as The Spending Years.
A. Pre-retirement
You’re working. You’re raising a family. You’re building your dream home. Probably graduating from a small home to a mid-size to Humongous over time. You’re building a business or a profession or a career. Your income is increasing and in fact is beating inflation. You’re healthy. You’re taking on some debt with the expectation that your income will continue to grow and that your investments and net worth will be more than enough to cancel out all that debt before, or at worst, by the time you retire. Even including paying off your mortgage.
Your kids are in private schools and eventually good colleges. You’re investing in their future. You hope that the kids will either earn scholarships or grants, or work their way through grad school, or at least that you’ll be able to handle their college tuition with your stable and increasing income. (And avoid student loan debt)
You own a significant amount of term life insurance, because it’s the right thing to do to protect your family, because you’re healthy, because you can qualify medically for the protection and because you can afford the low premiums.
You max out your company’s retirement plan, maybe even receive a matching contribution. (They assure you’ll be in a lower tax bracket in retirement. I want to meet “they” one day, I have a bone to pick with them.)
You buy a new car every few years but you pay cash and avoid those evil interest payments. (What’s better than paying cash?)
You travel with your family, after all, you need to smell the flowers and decompress here and there. You use credit cards wisely. Sure, you may allow credit card balances to creap up once in a while but you pay them off with bonuses or tax refunds.
( I get it. Tax refunds are probably the worst way to save, but it is after all a forced savings; the windfall is nice to see every April; anyway, savings accounts are not paying anything worth writing home about! )
You donate to church and community charities here and there, but after all you’re raising a family and you can always give more once you’re retired and have more “disposable income”.
Your kids are growing up, getting married, giving you grandchildren!
You’re the all-American family. Life is good.
B. Retirement
You’ve stopped working, because what’s the point? You have your social security, your retirement plan from work and some savings. You can make it pretty handily.
Maybe you take social security early, even though your advisor warns that you may lose a third of what you’d receive at age 66. And why would you want to wait until age 70 to get the maximum benefit? You can enjoy 8% ( eight percent! ) simple increases from age 66 to 70. But why wait? Who knows if I’ll be here tomorrow?
Hopefully you have a million or more in your 401(k) plan, as opposed to the “average” American who has $100,000 in theirs give or take. Can’t take much income from a hundred grand, not for long anyway.
Those cars that you paid cash for will eventually have to be replaced. You may not buy new and you may not buy as often, but you’ll either raid your savings or accept a modest monthly car financing payment. The credit union is offering zero down and zero interest!
So your savings account is dwindling. What’s a rainy day fund for anyway?!
You were the healthiest guy on the sofball team! But that pinch in your chest needs looked at and it winds up costing more in prescriptions. You didn’t remember paying such a high co-pay at the pharmacy twenty years ago!
One of the kids hit a bad streak of luck. Divorced. Came back home, move in with you
(“just until she gets back on her feet”) ….with two grandkids!! It’s great seeing the kiddies every day but the food budget does get stretched! And they leave the lights on forever!! Do they think you’re made of money? Or that you own the Electric Co.?
The house is paid for but roof repairs and a new AC makes you justify a “small” home equity credit line (“just until things improve”)
Your daughter needs a safer car to take the kids to school and soccer (“that deadbeat husband of hers, didn’t like him anyway”) She’s not working yet and HE ruined her credit – so you countersign her car loan. That’s what family does, yes?
You think about going back to work, but with a bum ticker and a bad back (all that softball) you think twice about it. Who’s going to hire you part-time?
Cost of living sure is expensive when you’re retired, huh? Never expected all these extra costs !! My kids are worth it though, and the smile on my wife’s face when those kids bust through the door after school? Priceless!!
Sure wish I hadn’t dropped that term life insurance. Can’t qualify anymore. Even if I did understand what that young, well-meaning insurance agent was talking about a few years back (something about “converting” my term to permanent, cash value insurance that will last my entire lifetime) you probably couldn’t have afforded the premiums… still… you do worry if your family will be OK if you were gone suddenly.
You’ve been getting more calls from that charity you always wanted to support but put it off… can’t do it now, too many “temporary” obligations… You feel you want to leave something with your name on it. But how? Seems too late to worry about it. Can’t get blood from a turnip.
Funny how those little credit card balances seem to grow just a little bit each month. You used to look forward to a tax refund to wipe them out, but not anymore. Have to bite the bullet and make those minimum payments just a little longer.
Little car payments creaping up. Plus helping with your grandkids’ private school tuition (“after all, they deserve the best!”)
Medicare supplement insurance bill. Forgot about that!
You thought living in retirement was a piece of cake – but you spend more now than you did before – after all, now that you’re retired, EVERY DAY IS SATURDAY.
You don’t want to deprive your family. You try going back to work… or a home business… THAT’S the ticket… (“Why don’t your friends want to invest in the very best nutrition / travel / body sculpting / network marketing business in the world?)
So here you are. Cost of living is a shocker. Family back in your home, maybe for a long time. Maybe even an elderly parent still with you? Indeed all blessings, even if expensive. Health not so good and the added stress doesn’t help. Bills mounting. Employment options rare. Fixed income is not the windfall you thought it would be.
What’s that you say? Market just took a tumble?
You don’t even want to think about what could happen to your spouse if you’re no longer here (a euphemism) and s/he runs out of money at an age when all the options are closed off. Enough said? (Or do you need a house to fall on you? Didn’t work out so well for the witch)
That term insurance agent* made it sound like your obligations to protect your family would diminish after you retired. Boy was s/he ever wrong!!
* We call sales people who push “buy-term-and-invest-the-rest” TERM-ITES.
Probably for more than one reason. (Ever see a termite under a microscope?)
One of the reasons is that they only know one product. One solution fits all.
You always had a nagging feeling that letting everybody else worry about it
(“after all, after I’m gone it’s not MY problem anymore”) just didn’t feel right.
But that nice man on the radio sounded SO convincing.
The Moral of the Story
This was a fictitious account, but one that is played out every day, everywhere – when good people have bad things happen to them… when the crystal ball gets fuzzy… when minds close… when valuable options are taken off the table.
Maybe this isn’t you. Maybe it’s your best friend, a business partner, a sibling.
The good news is, it doesn’t have to be.
The best plan in the world is one that leaves room for change. For choice.
There’s an old saying that you can’t predict but you can prepare.
Think about it. Why in the world would you make a choice today (term life insurance) concerning your or your family’s future financial health, indeed their survival – a choice that will become irreversible at some point – when the time period in question is likely to be decades longer than the term contract will cover?!!
I don’t even know what I’ll feel like eating on Friday night!! That’s why I want to keep my options open.
You can be prepared, then you will have the Freedom to change your course and your mind if and when the need arises.
The Unknown. We call it that for a reason.
Liberty. You can’t put a price on it.
-Joe Pantozzi
