As a consumer you are probably aware that you can insure virtually everything you buy. Any electronic device big or small, cell phones, kitchen appliances or even your pet can be insured. While we do spend considerable amounts of money on these items they are essentially worthless when compared to life itself. So, with life insurance resources abound, why are so many people spending hundreds of dollars every year insuring material items yet leaving themselves completely uninsured (or at least under insured) when it comes to their life?
Insuring the Unimportant
Part of this behavior comes down to how we think about life itself. By nature we live in the here and now. Thinking about the future is difficult and it is clearly easier to contemplate short-term issues. So when you go to the store and finally upgrade to that new big-screen TV you’ve been saving up for we naturally want to protect what we worked hard to obtain. When the salesman explains the 3-year extended warranty for $60 you don’t think twice. I mean, who wants to deal with the manufacturer’s warranty or possibly end up with a loss when it breaks the day after the warranty is up? These near-term fears will trigger the purchase of this sense of security.
The same goes for even smaller items such as cell phone insurance. Even with a low premium of 4 or 5 dollars a month this can become costly. If you have a spouse or kids with phones it can certainly amount to over $100 annually to protect insignificant depreciating assets. The reasons to insure your phone are simple. These small devices are prone to being dropped, left in a pocket while doing the laundry and being lost or stolen among other things. Given our attachment to these devices we certainly don’t want to be inconvenienced by being without our phone so this insurance appears to have a value.
Your Most Important Asset
Ask anyone what their most important asset is and probably 9 times out of 10 the answer will be their home. People think of assets as tangible things, things that cost a significant amount of money and are required to live comfortably. Understandably we have insurance on these things, and it is even required by law in some instances. That being said, the home is a very important asset but it is not the most important in most cases.
When you can’t easily put a price tag on something it is difficult to view its true value. Unless you live off of a trust fund or stay at home because your spouse earns all of the income, your life, more specifically your ability to earn an income is your most important asset. It is your income that pays the mortgage, buys food for the table, provides for your children and essentially allows you to exist. What happens when this asset suddenly disappears?
Well if you are single, live alone and have no kids you are in a position there will be little financial impact. But if you are married, own a home, have debt or kids the situation is far less appealing. Imagine for a moment that you and your spouse each earn $40,000 per year, you have a $150,000 mortgage, typical car payments and a few thousand in consumer debt. Now imagine that something tragic happens and you die in an accident. As if losing a loved one wasn’t bad enough, can your spouse now keep up with the bills? With half of the income gone can the loved one left continue to pay the mortgage, vehicles and keep food on the table without sacrificing something? If you left nothing behind you put your spouse in a very difficult position. It could result in selling the home, vehicles or even sacrificing quality of life due to your death.
Many people will easily spend a few hundred dollars every year buying insurance or extended warranties on the things we buy. As important as it seems at the time, ultimately they are worthless in the grand scheme of things. That isn’t to say you shouldn’t protect the things you buy, but more important is to understand that insuring these things should not compromise your ability to insure your most important asset.
The cheapest and first place you should look is with your employer. If you have benefits through your employer then you likely receive some basic life and disability insurance automatically. It may not be much, maybe only the equivalent of one year of salary but it is a start. Employers also generally make it possible to purchase additional insurance on this group term policy at a very affordable price. Often you can increase your coverage to 4 times salary for less than $10 per pay period (if paid bi-weekly).
If your employer doesn’t offer any of these benefits you can still obtain basic term insurance that is very affordable. I won’t use this time to discuss the various calculations you can do to determine how much insurance you need or expand on the different types of policies, this topic is meant to get you in the right frame of mind when it comes to what is important in your life and what you may be overlooking. Nobody likes to think about the unpleasant consequences of death, nor does anyone enjoy spending money on something that has the potential to never be used. But the consequences of being under insured could effectively ruin the lives of your spouse, children or family. So before you worry about protecting that $500 iPhone or new video game console take a moment to think about the things that really matter and make sure you aren’t brushing aside what’s truly important.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
Excellent post with great points.
Your article also provided me with a new insight about insurance. I hope I "never" need to use my life, major medical, disability, car, umbrella, etc. insurance. However, I have the insurance for the unforseen case I need it.
As you point out, it seems folks expect that they will need to pay for lost or damaged phones or electronics repairs, and therfore buy warranty insurance. If it's expected, it shouldn't be insurance it should be "planning" :-)
One caution I would give about life, major medical etc, is to avoid over insuring. For example, single people with no dependents don't need much, if any, life insurance.
Couldn't agree more with what you said in your comment "David, you are correct, when you die, YOUR worries are over. But if you have a family, their worries are just beginning."
There is such a thing as AD&D insurance (Accidental death and dismemberment), usually comes very cheap. Someone on a $20K salary can be insured to something like $200K for like $8 per year...do you think that's one feasible way of doing it?
David, you are correct, when you die, YOUR worries are over. But if you have a family, their worries are just beginning. Funerals aren't free, and if you were bringing in a significant amount of income to the family and it suddenly disappears you put your loved ones between a rock and a hard place.
Like you said, your ability to earn income is the most important asset which is why you need life insurance to replace it. Disability insurance is equally important but I did not include it because almost all employers offer some sort of disability insurance. And since it works differently than life insurance by replacing income as opposed to just a lump sum it can be much easier to cope with than death.
So both are important without a doubt, but a basic group disability policy may already provide for 40-50% of your salary, and then when looking at disability through social security you can wind up in a situation that isn't as devastating and completely losing a source of income.
Glad you brought that up.
If you die, your worries are over. Your most important asset is your ability to earn money.
You need disability insurance more than life insurance, particularly since your chance of being medically unable to work for awhile is greater than your chance of dieing during your working years.
You're right, you shouldn't be without adequate coverage when it comes to having children. As just a young couple without kids you can get buy with minimal coverage that is probably provided by employers, but by bringing a little one into the world you now have a lot of responsibility to go along with it.
And like you mentioned, it really is too cheap not to buy, which was the driving force behind this post. Insuring your life for half a million dollars is probably going to cost less than insuring your car, yet it is the furthest thing from people's mind... until it is too late, then people wish they had taken action before something happened.
We never thought about buying a life insurance before our daughter was born because it seemed unnecessary with both of us healthy. We bought the 30-year $500K term policies last year from MatLife and it was quite affordable (less than $800 per year in total). For people who have young children, I think that money is worth spending.