Financial Fallacies - You'll Always Have an Insurance Need

This is the second chapter of a three part series on common financial fallacies. (If you missed last week’s opener on your home being a good investment, you can read it here.) 

Another common belief that has proliferated - perhaps as a result of certain salesmen - is that you will always have a life insurance need. While permanent life insurance policies may have their limited and appropriate uses*, term insurance is almost always** the better way to protect the loss of life. 

The knock against term insurance is that it - well, has a defined ending term. The policy goes away (or the leveled premiums for the policy period skyrocket), leaving you with no cash value or anything to show. In this way, it’s akin to home or auto insurance. 

And that’s where our fallacy today comes into place - people assume they always need life insurance, when in fact, they most likely eventually outgrow the need for it. 

When calculating someone’s life insurance need, I typically look at the sum of three calculations: 
(1) the amount required to pay off all debt,
(2) the desired amount of income to replace for a certain time period,
(3) the present value to fully fund any future goals.

This gives you a top line of what your insurance need is - and over time, if you’re applying good financial habits like paying down debt and building up your assets, you eventually outgrow this need. And using term policy to cover this need costs fractions of a permanent/whole life policy. 

Yes, there could be certain life events that nudge your life insurance amount up, so life insurance coverage should be reviewed regularly - but it’s pretty rare for a family not to outgrow their life insurance need at some point as their debt decreases and their assets increase. 

*I’m talking extremely limited scenarios - such as estate planning with non-liquid, highly valuable assets to pass on. 

**One exception: for families who don’t have the discipline to save or investment money, the forced premium payments of permanent insurance can accumulate a savings amount that may not exist otherwise. 
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The Sky is Falling
3 min read | Retirement Field Guide
My good friend Ashby wrote this piece which picked up some much merited traction, thoughtfully ranting on the writings of permabears - or permanent pessimists. One of my favorite lines after a few good digs at the apocalypse-du jour servers:

It’s entirely possible to be both a short-term pessimist and a long-term optimist... If you are short-term pessimistic, then you will have your stable of less volatile assets to rely on when/if things go south in a hurry. And if you are long-term optimistic, you won’t be as apt to sell out of that downturn because you believe in the long term and are prepared for such an event.
I loved the replies from last week - especially from a super honest realtor (MH) whose livelihood depends on selling people homes, as well as this beautiful summary from Fident Friday reader FR (emphasis mine):

You buy a house. It provides you and your family shelter, warmth and security for possibly decades. Shelter, warmth and security are very, very desirable commodities. Years and years of sitting inside, eating, playing, caring for children with the heat running, the electric lights blazing and no rain or snow falling on your head. Sitting in your T-shirt watching a blizzard outside. Children snug in their beds behind locked doors.

If this thing provides you all these wonderful benefits for years, and you’re disappointed that its resale value has not doubled, maybe you’ve missed the point.

If my house ends up being worth nothing in the end, I have still mined great benefits out of it for decades. Increased resale value would simply be an unexpected blessing.

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