Why is it that people are so willing to invest their money in stocks, bonds, mutual funds, their own 401(k)'s, IRA's, Real Estate, Commodities, but are so unwilling to use another financial instrument? The instrument I am talking about is insurance. Life, disability, long term care insurance, just to name a few that have tremendous consequences on someone's financial outcome.
Believe me, before I got into the financial services business I didn't believe in, or understand insurance, more so the latter. I didn't understand insurance and believed like my parents and so many others that it was throwing money away. To be honest, even when I was getting my license I still really didn't understand or want to understand what the benefits of insurance were. People who are in the insurance side of the financial services industry say that you will never appreciate this business until you deliver your first check. Although I am sure that would solidify my beliefs, and even compound my appreciation for the business, I am here to say that I already appreciate it more than I ever thought I would.
Insurance is just another financial tool that should be used to achieve your financial goals. In fact, life insurance in particular is probably the most versatile financial tool, yet people do not use it. Why? People don't understand how to use it, and secondly they don't want to consider thinking about death. I am going to let you all in on a little secret--one day, we all are going to die. I'm just dealing with facts here--death and taxes, are the two certainties right? Why not find a way to pay as little in taxes while you are still here and still have access to your own money. Little known fact: Life insurance enables you to do that! Get over the fact you will one day die, and get over the fact that this financial instrument will pay your beneficiaries, if you happen to die sooner than you have planned. Life insurance is a financial tool that could make you wealthy over time, but too few of us use it!
Most people I know seem to have the "Superman complex". They seem to think that they are either invincible, or are lucky. If you are a 30 year old you are 4 times more likely to become disabled than you are going to die. What does that mean to you? That means you are likely going to lose a significant portion of your income if you don't have a plan in place to protect that. How many of you have a plan in place that will protect your income? Did you know that a good disability insurance covers you if you are unable to perform your own occupation until you are 65? An example: if you are unable to perform your own job responsibilities but are able to go out and get another job, not only will you receive your new job income, but you will also receive the disability payment as well, which is usually up to 60% of your income tax free!
Someone recently told me this year that they are going to "invest all they can into their retirement" rather than pay for a long term care policy. I find that to be an interesting strategy and here is why: it is estimated that 70% of people who reach 65 will need some form of long term care before they die. (Council of Economic Advisors. Economic Report of the President. 94. Washington, DC: U.S. Government Printing Office. 02/17/07) Are you going to be part of the 30% who will not need any form of care? Odds are, most of us are not. Based on national averages the cost of Home Care is $58,400/year as of 2008 and increasing year after year. The cost of Facility Care is $77,380/year and is also increasing.
Let's use this person as an example: Age 56, so they are actually able to contribute up to $21,500 into their 401(k). Let's say they plan on retiring at age 62 (because 2008 happened). So from now until 62 they will contribute the maximum into their retirement account and let's assume that they will also get an 8% return each year until then, and once retired a more conservative 4%. Let's also assume at age 72, they will need some form of long term care (probably home care). So at retirement just based off of the 6 years of 401(k) contributions they have an additional $147120.29. By 72 they will have amassed $217,773.97. By the time this individual will need long term care it will cost roughly $135,000/year for Home Care. So putting all their money into their retirement will afford them roughly a year and a half of care. However, if they would have purchased Long Term Care Insurance the insurance would cost roughly $2,800/year and cover $104,000 of expenses. Leaving a little more than $30,000 needed to come out of pocket. Using this illustration seems to me that their retirement would benefit longer by passing some risk onto the insurance company.
