It’s reasonable to think that someone who earns a lot, has a lot, but of course that’s not always the case. We all know big earners who are also big spenders (and small savers). Unfortunately, those big outlays usually don’t include premiums for an amount of life insurance commensurate with the big spender’s lifestyle.
As you know, the purpose of life insurance is to replace an income and/or retire a debt. We know the big spender has a big income and can reasonably surmise that s/he also has big debts. That is a sure-fire recipe for a large life insurance policy, but in my experience, only occasionally is.
As a general rule (and there are always exceptions to general rules, including this one), as we move up the economic ladder, the amount of life insurance we need increases. The problem, largely fed by the mainstream media, is that people think they will reach a point where they will not need life insurance.
While that could theoretically be true, I believe it is very rare. Let’s look at an extreme example. Take a big earner who is also a big saver and good investor. Let’s say he’s now 60 years old, kids are educated, no debt, is earning $400,000 annually and has amassed, through aggressive savings, astute investing, and a modest parental inheritance, an estate worth $8 million that is largely liquid.
If ever a case can be made for “no need,” this is it, right? And in the strictest sense, I concur. But let me ask you this: If this individual had a car, a boat, a house, or jewelry worth $400k, do you think he would leave it uninsured? Possibly, but I kind of doubt it.
The fact is our incomes are assets, oftentimes our most valuable assets. I’ve never understood why one would insure her possessions, but not the asset that pays for them.
So am I saying that if you have a small income and no debt you don’t need life insurance? Not at all, although you may need less. Don’t forget, the younger you are, the longer your income stream. A 25 year old making $50k has the same future income as a 45 year old making $100k.
This uninsured (or underinsured) phenomenon is somewhat understandable, because, fortunately, most people are never brought face to face with the reality of losing a breadwinner in the household. If they did experience it, their response would, in all likelihood, be much different. Don’t believe me? Watch this.
While the odds of a premature death are small, the effects are devastating. While the emotional effects will have to play themselves out, the financial effects can be mitigated beforehand through the proper use of life insurance.