It is time for the next entry in our 7-part blog series, “The 7 Deadly Sins of Retirement Planning.”
Today, let us focus on protection: our families, our property, our money, and more importantly – our lives! That is why Deadly Sin #6 is Mistakes with Insurance!
The 7 Deadly Sins Are:
- No Holistic Plan
- No Spend Down Strategy or Exit Plan
- Too Focused On “Growth” Rather Than “Income”
- No Volatility Buffer / Non-Correlated Asset Classes
- Not Risk Smart
- Mistakes with Insurance
- No Strategy for Taxes
In general, people are woefully underinsured. It is unfortunate, but time and time again, I find this to be true.
Let us start with the area that I think is most important: Protecting your family with Life Insurance.
I think people should buy term life insurance equal to their human capital equivalent value.
What the heck does that mean?!
I mean that they should insure themselves for their full earning potential. So, for example:
*If a 45-year-old is making $100,000 per year, and is going to work for 20 years, until age 65, what is their earning potential?
$100,000 per year x 20 years = $2 Million. They should have $2 Million worth of term life insurance.
If you are 55, you should have 10 years’ salary; if you are 35, you should have 30 years’ salary.
I always find it interesting when people try to shortcut life insurance… this is about protecting your family by replacing the full amount of income that you would earn to support them.
This is about making their dreams come true, whether you are here or not.
As a working father or mother –
or husband or wife – you are the ATM machine for your family.
Your ability to work and earn income means that you are going to generate cash flow to support them throughout your working career.
Let us think of other forms of insurance.
How much do we insure our homes for? Or our cars for? Full replacement value, that is how much!
Do people shortcut their homeowner’s insurance by saying “Well my home is worth $400,000 and I’ve got $200,000 in my 401k.
So, I will only insure my home for 1/2 of its replacement value, and use my 401k to pay the other 1/2 if it burns down”?
No, that is ridiculous! They place coverage for full replacement value on their home, even when the mortgage is fully paid off!
Do people shortcut on their auto insurance by saying, “Well, I’ve got $30,000 in the bank in case my car gets totaled, and my IRA can pay for any lawsuits that my come my way if I cause the accident and get sued.” NO!
We insure our things for full replacement value… why not our life? Which one is more important?
Life insurance can create millions of dollars of capital out of thin air in case the worst of the worst happens.
God forbid, if your family is struggling through the loss of YOU, don’t make your spouse wonder how they’re going to retire, how they’re going to pay the mortgage, how they’re going to send the kids to school/college, and how soon they’ll have to return to work.
Now that is in term. Also look at converting the term into whole life insurance.
Cash value life insurance is a great non-correlated asset class. These policies generally grow around 3-5% tax free, with no market risk, and can be used for tax free cash flow in retirement!
And in the meantime, I am protecting my family with a policy that we are guaranteed to see some sort of benefit from!
In addition, permanent life insurance can be a key piece in a “pension maximization” strategy, and even to protect & replace social security benefits! (I will just touch on that here, as this strategy could be the subject of its own blog post)
Even if you are single, who is going to protect your retirement plan if you become disabled? There is no disability protection on a 401k. If you cannot work, then you cannot earn. If you cannot earn, you cannot contribute to a 401k. And just because you are disabled does not mean that you will not need money past the age of 65.
You can add a disability waiver of premium to your cash value life insurance policy so if you do become totally and permanently disabled, the insurance company will fund your policy for you!
Speaking of disability – have you reviewed your workplace policy lately? Do you understand the benefits?
Have you maximized the benefit through purchasing a supplemental policy?
If not, could you really live on 1/2 or less of what you are earning now in the event of a long-term illness or injury?
This is a critical consideration during your working years.
Also of note – many permanent life insurance policies also have chronic illness or long term care benefits that will allow you to spend your death benefit while you’re still actually alive, if you need to go into a nursing home for a long term care event later in life.
Speaking of 
long term care – do you realize that according to both the US Department of Health and Human Services and AARP – that there is a 60-70% chance that a person will need some form of long term care before they die?
Full time nursing home care, on average, is over $90,000 per year in America.
Consider that the average stay in a nursing home for a man is 2.2 years.
For a woman, it is 3.7 years. Multiply that x $90,000 per year.
Now attempt to factor in the skyrocketing cost of medical care, which increases at a much higher rate of inflation.
What will that look like in 20, 30, or 40 years? Not a pretty thought.
No wonder why most long-term care givers are NOT professionally licensed caregivers.
You read that right.
Because it is family.
Due to the cost, families try to take care of mom, and take care of dad, many times ruining their own health, finances, and family relationships in the process, before finally putting mom and dad into a nursing home as a last resort.
Do not believe me? Here is a homework assignment.
Go into any assisted living facility or nursing home, find the nicest family there, and ask them just 2 questions:
- How are the finances working out?
- How are all the brothers and sisters getting along?
Do you know what you will find?
The finances are NOT working out.
And I’ve been 
doing this long enough to know that there will be people who read this blog where they have an issue in their own family.
Where some of the brothers and sisters are not talking to other brothers and sisters because of what happened to mom or what happened with dad.
Long term care can wipe you out financially, and it can also harm family relationships.
You can avoid many of those issues by transferring the risk to an insurance company:
- Now the brothers and sisters do not have to worry about the cost.
- They do not have to feel guilty about depleting mom and dad’s assets.
- They do not have the added responsibility of paying out of their own pocket.
- They do not need to worry about taking time off work or rotating “shifts” between family members.
- They can hire professional assistance, and ‘round the clock care if necessary.
Guess who pays for all of that. The insurance company!
For pennies on the dollar, a family can purchase peace of mind, security, and knowing that loved ones will be taken care of.
Research your options. Insurance companies are innovating incredible types of programs to deal with this immense & ever-growing long-term care burden.
There are even life insurance policies and annuities with long term care benefits!
There are also stand-alone long-term care insurance programs where if you buy the right kind of policy, all of the care can be done in the comfort of one’s own home.
That is right, you can buy long term care insurance with home health care. It is what I have already done to protect me and my family.
So, this is not nursing home insurance – it is ANTI-nursing home insurance.
It stays in your home insurance.
Stay in control insurance.
Maintain your dignity insurance.
I encourage you to take this risk seriously and plan ahead for it by transferring the risk to an insurance company, in one of the ways discussed above.
Not having long-term care insurance can be “the single biggest devastator” of your financial plan.
(source: cnbc.com/2019/10/14/lack-of-long-term-care-insurance-can-devastate-your-financial-plan.html)
You think long term care insurance is expensive? Try not having it.
At the end of the day, this is about your life. Your financial plan. Your retirement. Your happiness, security, and enjoyment. You work SO HARD to build it. And if it is worth building, isn’t it also worth protecting?
Thanks for tuning in to blog post #6. Contact me for a complimentary appointment. And do not forget to check out the final installment in this series, Deadly Sin #7: No Strategy for Taxes.
P.S. If you haven’t checked it out yet, please stop by my mini online seminar How Retirees and Pre-Retirees Can Potentially Avoid Going Broke While Keeping Their Nest-Egg Secure! Tons of great information and bonus is it is 100% COMPLIMENTARY!
*Hypothetical example only.
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