How to Best Care for Your Future Widow

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Let’s say you’re in your mid 50’s, the kids are leaving the nest, the mortgage is nearly paid, and the 401k has grown well.  Your financial position isn’t where you want it, but it is within striking distance.

But you’ve also lost a parent or two, and the brevity of life is coming into clearer focus.  You consider the final quarter and envision your wife as a widow, as statistics say most women become.  You can buy a 20-year level premium $250,000 term policy for only $100/month to bridge the gap while getting closer to Social Security age and completing financial goals. Is that a good idea?

Or is there a better use of that money, say to accelerate the mortgage or fund a Roth?  Which is likely to help her more?  Let’s see how it usually plays out.

We are more emotional than we would like to think, especially when it comes to fear-driven issues like life insurance.  It leads to overbuying.  It may be motivated by noble intentions of a husband, anxiety of a wife, or an agent.

It’s often accompanied by unawareness of other survivorship benefits like a death benefit under a pension plan, or how the 401k could bridge the gap to Social Security Survivorship benefits.  Agents whose compensation is a percentage of premium collected are more tempted to fan those embers of fear than explain to their clients how they are insured already, how unlikely they are to get a return on their insurance premium dollars, or alternative uses of those dollars.

The paradox of overbuying is that, while creating an immediate illusion of security, those expansive decisions rarely help the family.  Well over 95% of 10-, 15-, and 20-year term policies expire before the insured does.  They are paid for over their term and then thrown in the trashcan.  Like playing the lottery: a bad bet.

On the other hand, your wife is likely to become your widow.  Men on average die five years before women and their wives are sometimes younger too.  How should you address this need?

Ironically, it’s not necessarily by buying more life insurance.  Look at some simple probabilities.  These are tapes that are always running in the back of my head when advising clients on life insurance.

What will $100/month, directed three different ways, likely become by the time our 55-year-old dies?

After 20 years: In another 10 years, near normal life expectancy
Term life ins. 90%+ get nothing
Prepay 4% Mortgage $36,000 greater house equity $53,000
Roth IRA @ 8% $59,000 $130,000

This example considers a male in his mid-50’s, buying a $250k 20-year level term policy for $100/month, or using the same amount to prepay the mortgage, or fund a Roth.

Compounding $100/month savings for 20 years, and then compounding that total another 10 years without further premium contribution (puts him closer to normal life expectancy), equals $130k in a Roth for his wife’s (or his) ultimate use, versus a term policy in the trash can.  Which better cares for their likely future?

 

(This is a revision of a guest blog on Sound Mind Investing Editor’s blog, February 4, 2011.)

Is Insurance Biblical?

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The mathematical chassis upon which insurance is built is commended by Scripture: utilizing numeric strength to meet the needs of some through the strength of others and thus level out some bumps along life’s path.

  • Two are better than one because they have a good return for their labor. For if either of them falls, the one will lift up his companion. But woe to the one who falls when there is not another to lift him up. …. A cord of three strands is not quickly torn apart. Eccl 4:9ff
  • For this is not for the ease of others and for your affliction, but by way of equality- at this present time your abundance being a supply for their need, so that their abundance also may become a supply for your need, that there may be equality; II Cor. 8:13ff
  • And all those who had believed were together and had all things in common; and they began selling their property and possessions and were sharing them with all, as anyone might have need. … And the Lord was adding to their number day by day those who were being saved. Acts 2:44ff

The goal is to meet needs through sharing, but it’s on a volunteer basis motivated by trust, obedience, and generosity, rather on a contractual basis motivated by fear and greed. It’s sort of like the difference in a wedding covenant “for better or worse” versus a prenuptial contract.

However the motivation by which insurance is frequently promoted (encouraging worry and worse-case-scenario thinking) and bought (fear and forgetting God) is not Biblical. What pleases God and testifies to the world is when this is done on a voluntary basis in faith.

Let me add an important word here about our emotions, for although fear can lead us astray, God created emotions and realizes that we are emotional creatures (“but dust” Ps. 103:14). He gives babies mothers to hold them close, he wept with Mary and Martha at the death of Lazarus despite knowing He was about raise him to life. He also gives us some very practical advice that will make us feel secure and it is primarily about debt: have none, have some reserves. Also, tithe and test Me in the process. Learn how I will meet your needs.

This is a very important distinction. The subprime mortgage crisis was not caused by too little insurance but by too much debt. Too little insurance will not be the downfall of America (in fact shrinking it would help); debt is much more likely to be our downfall. A debt-free person is stronger than a well-insured one.

God doesn’t just throw us out unclothed into a harsh emotional winter and say, buck up. He gives us very practical priorities which will strengthen us for real life contingencies that insurance never will: bringing your wife home to care for kids, losing a job, underemployment, a decline in real estate values, emergency outlays, helping a friend; as well as an “early” death, disability, or casualty loss (commonly insured events).

My beef with insurance is that it’s often a distraction from what strengthens us most, when on average it shrinks every dollar. God wants us to be secure, not merely feel secure and insurance is often more illusory than real.

One purpose of IIA is to help you avoid some of the unbiblical ways it’s promoted and bought which lead to excess. It’s easier for us to do this since we are not compensated based on how much you buy.

America, the Colossal Example

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We’ve talked about how we are creatures of fear, how fear can move us to idols, and how idols levy a heavy toll. Insurance can become an idol. Because this is rooted in the human heart, you see it played out at different levels. Let’s look at a macro and micro-level example.

You hear a lot about the debt, but one of America’s greatest economic challenges is insurance: Social Security, Medicare, and now national health care. Each has enormous overhead. Consider our move to national health care. Already private health insurance has been the greatest facilitator of inflated health care costs, encouraging provider greed and consumer abuse. Now we want to take it to a new level, with incomprehensible overhead to boot. (Can you define “insanity”?)

What would address the real problem at its roots is moving oppositely: rather than bolstering insurance, unraveling insurance.

Simultaneous with this harmful expansion, we are borrowing trillions we cannot repay. So we have two mega forces working against us. Massive insurance plans whittling down every dollar that goes through them by the overhead inherent in any type of insurance; along with interest that makes every dollar cost two.

Now consider the same dynamic on a micro level. For about ten years I worked with a school system on its group benefits. Frequently I would see teachers paying $30-40/month for Short Term Disability insurance, with another significant amount going to credit card interest. This was two slow bleeds each month: premiums and interest.

Because they spent on premiums money that should go to emergency fund, when an unexpected event occurred (new tires or washing machine) it had to go on the card (meaning even more interest). Then because they had this credit payment they were afraid to drop the insurance. (Fearing if sick they couldn’t make payments). One fueled the other.

Why this dual damaging dynamic? Many bought the insurance because of how it was promoted: “What would you do without a paycheck?” However once reminded of Sick Days, the ability to borrow from a retirement account, and the likely poor return on the insurance, they had a different attitude. Many dropped the insurance and redirected premiums to credit cards. Carefully thinking about how they were insured already allowed them to jettison extraneous insurance, pay down debts, and build emergency funds, which allowed them to stay debt free.

Uncle Sam should do the same.

There is a corollary lesson here. The source of advice on how to best use insurance made a big difference for these teachers. The purpose of Impartial Insurance Advisor is to offer an alternative source of high quality, experienced advice from someone not under the influence (of commissions).

The High Cost of Idolatry

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Can Insurance become a form of Idolatry? Please bear with me here, if you think I’m nuts, for the point of this question is not merely esoteric. It affects your pocketbook.

Where do you look for security? Would it be more threatening to not pay your tithe or not pay your premium?

You’ve probably heard the humorous story of the man who falls off the cliff. He grabs a root near the top and as he holds on for dear life yells, “Help! Can anyone help me?” The response comes, “I am God and I’ll catch you. Let go.” After a brief pause, he replies, “Is there anyone else up there that can help me?” We smile because we relate; faith is unnatural. Man has always been reluctant to trust God. Even in the Garden, Adam got suspicious. So we make our provisions.

In I Samuel 8, Israel was led by Samuel, God’s priest. However they wanted to be like the other nations and have a king to “go out before us and fight our battles”. They wanted something more concrete and visible; they wanted something that would make them feel safe; they wanted to do it the way those who did not know God did it; they wanted to walk by sight rather than faith. God didn’t like that, but He allowed it. Then He explained a very important consequence.

This king will “take your sons and make them serve, He will take your daughters … He will take the best of your fields and vineyards and olive groves … He will take a tenth of your grain and of your vintage … Your male and female servants and the best of your cattle[c] and donkeys he will take … and you yourselves will become his slaves.” You can have him, but the cost is high. One day you will regret it.

A major part of smart insurance buying is choosing an amount. While folks will agonize over getting the best rate, they often overbuy in amount. (Straining at gnats and swallowing a camel.) This is exacerbated in the typical sales context where there is no incentive to carefully bring out how one is insured already. If you forget God, insurance can become an idol, and you will tend to overuse it. Larry Burkett asked, “If you die, does God die with you?”

Most insurers are inefficient financial intermediaries. They have a very high cost of acquiring business, state premium taxes, and then like any corporation have overhead, profit to stockholder, etc. Most people pay more in than they get out.

We often compartmentalize our finances when choosing an amount of insurance, but it’s usually smart to carefully consider other resources that might help us. Would my wife work, might she downsize the house, is there a future inheritance, Social Security? Then use insurance sparingly rather than liberally.

Fear or Faith – What’s Motivating You?

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When we have a problem, awareness is the first step to cure. Consumers have a problem. As much as some may point the finger at insurance sales practices, the fact is insurance consumers are ripe for manipulation without a sales agent.

Fear is rooted in the core of every human heart and it’s the invisible foundation upon which is built all those insurance company buildings that punctuate most large city’s skylines. Sure there are unpredictable events that occur on earth (that’s part of the problem too), but those are events over which we have little influence. It is our emotional response to those possibilities that make us buy poorly.

Ever since that one act of original sin, that reluctance to trust and rest in God alone, man has been fearful. (Genesis 3:10) It was a result of the curse. Our fearful nature makes us very vulnerable to mistakes. Here are a couple of examples.

Our fears tempt us to focus on worse case scenarios, “What if?” and we list out all the potential problems. But if Jesus emphasizes, “I will never leave you or forsake you”, or “don’t worry about tomorrow for tomorrow will care for itself”, then worse- case-scenario thinking must not be of Him.

Fear can be good if it leads you in the best direction, but insurable fears are often distractions from the tried and proven path to financial freedom.

Good fears:

Fear God and honor Him with the tithe. He is your provider and protector.

Fear debt and recognize it as enslavement. Get free.

Fear the fact that you don’t know what tomorrow holds. Have an emergency fund.

Misleading fears:

So we buy a life policy, but mom gets pregnant and needs to come home from work (it helps little); we buy a disability policy, but get laid off; we buy dental insurance, but the transmission goes out. Due to the narrow nature of insurance it often doesn’t help out, whereas God’s priorities are broader and would have helped out with all three.

We are born with embers of fear smoldering within us. Commissions tempt agents to fan those embers. This negative synergy wastes a lot of dollars.