I recently had a sad experience that caused me to refocus my attention.
A widow asked for my advice. Her husband had died suddenly in his mid-sixties. He had no life insurance. The couple lived "within their means", but had little in savings. She had one overriding question: Could she stay in the family home?
I told her I didn't see how she could afford to do so. In fact, it was likely she would have to return to work.
Massive underinsurance
According to a survey conducted by Nationwide Financial, the average U.S. life insurance policy covers only about 16% of the lifetime earnings of the insured. Only 2% of those surveyed had sufficient life insurance.
Reasons for underinsurance
There are many reasons for this insurance gap. Here are the big ones:
Cost: Obtaining sufficient life insurance may cost less than you believe. According to Nationwide, a $99 monthly payment over 20 years would give a healthy 35-year old $2.3 million of life insurance.
Denial: Few want to confront their own mortality. Yet, it's irrefutable that we're all going to die. The data indicates women are four times more likely than men to be widowed. Have you really thought about what would happen to your spouse when you die?
Hypocrisy: I hear couples affirming their love for each other. It's touching, but it can also be hypocritical. If you really love your spouse, you'll consider the impact of your death and act in a fiscally responsible way to insure the quality of life of the surviving spouse. Life insurance is a critical component of your financial planning. Ignoring it is both hypocritical and irresponsible.
Bad advice: If you are using a broker or an advisor who charges a fee based on assets under management, be aware that recommending life insurance reduces those assets. Consciously or otherwise, it may not be at the top of the list of financial planning suggestions. Registered Investment Advisors have a fiduciary obligation to always act in your best interest. They should be sure you have adequate life insurance as part of the holistic planning process. If they don't, raise this issue with them.
Confusion: Unfortunately, life insurance is one of the most confusing products available. Some throw up their hands and simply ignore the need. This is a huge mistake, with potentially disastrous consequences. For many, an inexpensive term policy is the best option. A reliable source of information from a highly rated company is TIAA-CREF. You can deal with them online or on the phone. My understanding is they are not commission based. I have no association with this firm or with any other insurance or advisory entity.
Distraction: When is the last time CNBC did a feature story on the need for life insurance? The big money in the wealth management business is generating fees or commissions derived from managing your assets. The reality is that most Americans are terrible investors, earning returns that don't even keep up with the rate of inflation.
Americans also are not great savers. By some estimates, the average American saves less than 5% of disposable income.
The combination of low savings, poor investment returns, massive advertising by the securities industry and the failure to confront our mortality, is the perfect storm for spouses. No wonder becoming a widow is "an important risk factor for transition into poverty," according to a report on the web page of the Social Security Office of Policy.
It's time to step up and do the right thing. Check your life insurance coverage. If there's a gap, fill it. Procrastination is not a viable plan.
The views of the author are his alone. He is not affiliated with any broker, fund manager or advisory firm.
Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.
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