Q : What’s the difference between an insurance company CEO and the mafia don?
A : The insurance company CEO can tell you how many people will die this year. The mafia don can tell you the names of all of them.
I recently had a tenant pass away, leaving his wife and three children. He had some life insurance, but it was pretty inadequate. Since they had a special needs child, the wife was a stay at home mom while he worked. Given the insufficiency of the insurance policy, she was faced with a choice to either go back to work or to downsize into a smaller and more inexpensive house, with either decision uprooting her family in a time of severe emotional stress.
As a result, I’ve seen the downside of what happens when you don’t carry enough insurance for your family.
In general, people purchase insurance for four reasons:
- To replace a departed parent’s income to cover raising the children until they can go out on their own.
- To replace a departed spouse’s income so that the remaining spouse can enjoy the same standard of living that the couple had.
- To care for a special needs dependent.
- Inter-generational wealth transfer.
Notice that none of those choices involve investing. Do not purchase insurance as an investment, no matter how many slick charts insurance salesmen show.
My tenants could have easily made a case for the first three, but they needed insurance for numbers one and three in any case. I’m sure they hadn’t actually developed a financial plan, so they thought that having the meager amount his employer offered was sufficient if something happened to him.
It was not.
But, still, most healthy thirtysomethings don’t just drop dead in the middle of the day.