Life Insurance Bete Noire

August 4th, 2014 by Potato

Just before Blueberry was born, we had a discussion about why we didn’t need life insurance for our situation. I’d like to broaden that discussion a bit, but I have to tread carefully. There are many who are under-insured not because they have decided that insurance isn’t for them, but because they just haven’t gotten around to it yet. I don’t want to encourage further procrastination (well, I do — don’t go off and work, read my blog!), and it can be very important for many people out there. But at the same time the insurance sale may be a bit heavy-handed and the base assumptions seem to increase the apparent need. Part of that may be my perspective: my value system is compatible with the idea that my survivors’ lifestyle shouldn’t be completely untouched (let alone improved) by my passing.

Here is why I’m out of the mainstream:

  1. my idea of dependents
  2. my idea of lifestyle of survivors
  3. my assets/situation

The idea of dependents is a bit of a strange one these days: kids are and always will be, but we are long past the time when the typical family consisted of one breadwinner head-of-household and a stay-at-home spouse (who was typically the female head-of-household). Many families are dual-income now, and even many of the ones that presently aren’t could be (modern stay-at-home mom or dad is likely university educated and had a career before getting hitched at an ever-later age and spawning). So your family would be without your income if you died, but they could still have some income. In our case, Wayfare actually has a much higher earnings potential than I do, and after Blueberry’s in school she could ramp up her hours worked to fully offset any loss of income from my death.

The assumptions of what the needs of survivors will be also seems a little over-the-top to me: some sites suggest full income replacement until you would have retired. But if I’m not there to spend part of that money, it means that my survivors would have an economically better life than if I were still there (except for the dark void in their hearts). Liabilities are also a typical factor in calculators estimating your needs: having enough to instantly pay off the mortgage is common, but seems to imply that they would or should stay in the same house, rather than downsizing, and that the surviving spouse wouldn’t be paying any of that down. For mortgagees, some insurance is a good idea because house prices can go down and transaction costs can be high, and you don’t want your survivors trapped and unable to extract the equity to move on.

The typical assumptions seem to imply that the survivors won’t make any adjustments in their life, work, or spending to compensate for the loss, which can lead to some large insurance needs. Instead, I figure that if I die, Wayfare and Blueberry will be free to move to a smaller, cheaper rental. There will be no need for a place so large with one person down (my whole dual-monitor home office set-up will reduce the room needs by one, and I don’t think Wayfare needs a kitchen half as large as the one I insisted on). And part of the reason for living in the over-crowded fourth circle of hell Toronto is the arcane arithmetic of the two-body problem and large populations; freed of that constraint they could move to a cheaper centre like Hamilton or London. Combined, a smaller place in a less-expensive town (or even less-expensive part of Toronto) could cut rent costs in half. On top of that is the significantly non-zero probability that Wayfare will find a replacement spouse who is gainfully employed.

Having a contingency so that these adjustments don’t have to happen right away makes sense, as does enough coverage for daycare until Blueberry is in full-time school. That’s where our situation also helps with my estimate of minimal insurance needs: we already have over a year’s worth of expenses saved up, and supportive parents who could provide an additional layer of security if we badly screwed up the math. As it turns out, my job came with group benefits for some measure of life and disability insurance (and it is the disability insurance I am more worried about).

Death is tragic, but from a financial perspective it’s not the biggest cause of young families losing an income. Divorce can not only rip daddy away, but cause massive upheaval and lead to a chunk of the “estate” being lost to lawyers. I’m ok with the idea that if I die, even with just 2 years of income for insurance coverage, my family will still be better off than those who started from similar circumstances and got a divorce. But I don’t want to make the delta so large that perverse incentives form.

Back to insurance: I actually found it quite hard to find ballpark quotes on disability insurance outside of my group plan. For life insurance I think it is important to disaster-proof your life, but the actual coverage need might not be quite as high as some calculators suggest, if you’re ok with the idea of your survivors taking basic steps to adjust for the loss.

6 Responses to “Life Insurance Bete Noire”

  1. save. spend. splurge. Says:

    ” But I don’t want to make the delta so large that perverse incentives form.”

    I read that and immediately had an image of Blueberry (this cute child with a blueberry for a head of course), saying: “Here Daddy.. why don’t you try one of my blueberries…… *evil glint*”

    :)

    In all seriousness, I am of the same mindset although if BOTH of us died, that’d be something new to consider, rather than what if one of us died. If one of us died, it would be OK as we each have the same earning potential and would be capable of taking care of Baby Bun.. but if BOTH kicked the bucket? Baby Bun would have to move back to Toronto.

  2. LifeInsuranceCanada.com Says:

    The MOST important part of your post that readers should get about life insurance is that you’ve researched, thought it out, and made a decision. That’s what’s important. Like you, my personal life insurance choices are also not mainstream (they differ greatly from what most of my clients have), because I’ve weighted things differently.

    The one possible flaw in your post is that you (seem to) have minimized the impact of a lot of things in an attempt to minimize your insurance needs. When you’re doing risk management like this, you should be also looking at conservative scenarios, not aggressive ones.

    I guess to illustrate, I’d use your selling the house scenario. There’s a world of difference between saying “you have to sell the house if I die, because we want to save on life insurance premiums” to “I would downsize because I chose to, not because I have to”. In the first scenario, things can go bad financially when someone’s under pressure to sell a house due to death. In the second, that’s just planning.

    And since I’m in a cheeky mood, I’ll illustrate with a typical sales-person tactice. When I bought my fishing boat and was struggling to decide if I wanted 30horsepower or 40, the salesperson said “I’ve never had someone come back and tell me they had TOO much power”. Similiarly, I’ve never seen a death claim where the beneficiaries though they had too much insurance. So round up, not down with life insurance.

    That being said, I bought the 30hp and it’s worked OK :).

  3. LifeInsuranceCanada.com Says:

    Oh, and excellent post. One of the best intentioned posts on the internet when it comes to life insurance. That was my point in my previous post :).

  4. Potato Says:

    Thanks!

    Further to your first point of praise, we also have some idea of our pain points, what changes in our situation might necessitate an increase in our insurance needs.

  5. Alicia Says:

    I can definitely see it being situation specific. For example, my father is well insured, but mostly for tax planning reasons (whole insurance due to high salary). When I went to go get insurance, he suggested I get that. My response to my father? “Why… I’m not expecting ad to get rich off my death. Must enough to pay off the house, and not be concerned if he is busy mourning to work (for the short term)”. I opted for a 25 year term policy that is the mortgage amount and one year of my salary. Whole life wasn’t on my radar. But I wouldn’t go insurance less… Likely because our incomes are not split 50/50. Not even 40/60. More like 2/3, 1/3.

  6. Potato Says:

    And to repeat LIC’s comment back to you, Alicia: good work analyzing your needs and finding what fits you!

    I think it also shows that even with similar circumstances, personality differences can influence the choice. In a similar situation (granted, there’s only so much a one-sentence description and background knowledge from your blog can inform me on your situation) I would lean towards getting the insurance that I need and not one little bit more. So I might come to the same decision about how much insurance to get, but pick term-10 vs term-25 because I’m a risk cowboy and hate premiums, figuring that I’d re-examine the need in 10 years’ time. (Again, not to say that your choice is wrong, just to point out that my bias is to minimize insurance carried)

Leave a Reply