Clients ask me all the time, “what would you do if it was your own money?” Or, “what would you suggest for your own Mom and Dad?” Or, “what are you doing for your own kids?”
Those are interesting questions to answer, because every situation is unique. But over the next couple of weeks, I’ll show you exactly how I insure, save, spend, and invest within my own household. I’m not saying that it’s the “right” way, but it’s my way, and my wife and I have set it up to reflect our values, goals, and aspirations. And while every situation is unique, you and I may share many of the same values, goals, and aspirations, which could lead us to a similar strategy.
Part I: Protect What You Love
Insurance is not the most exciting part of your financial life, but it is a key component of a well-drafted plan.
I am fluent in many areas of insurance, but home, auto, and umbrella are not among them. The best advice I can give you is to find a trusted, independent insurance agent who will guide you through your options. (If you’re in need, I can put you in touch with someone at the Rummel Agency.) Personally, my wife and I will forever be grateful for Michigan’s no-fault insurance (which recently changed) and will gladly pay extra for unlimited PIP for the rest of our lives. (If you know my wife’s story, you’ll understand why.) We’ll also always carry an umbrella policy, because for a little over $100 per year, I can protect myself and my family against a lawsuit-happy society.
I have health insurance for myself and my family through the Rummel Agency group plan. A common setup is for employers to pay about 70% of the premium (i.e. monthly cost) and employees to pay the remaining 30% via payroll deduction. Many employers only offer one plan, so you take what you can get. But if you have a choice (maybe you’re self- employed or on Marketplace with multiple options), I’m a big proponent of high-deductible plans. Long story short, because of the dilution of health plans since the introduction of the Affordable Care Act, most plans have a similar out-of-pocket maximum regardless of whether you have a high deductible with low premium; or a low deductible with high premium. Your out-of-pocket maximum is basically your “worst-case scenario” of costs, so if your worst-case is the same regardless of whether you’re paying a high premium or a low premium, you might as well take the low-cost plan! If you’d like, I will gladly show you the math.
Rummel Agency provides short-term disability and long-term disability as part of my employment contract. Generally speaking, disability contracts will pay about 60% of your normal income in the event that you become sick or injured and qualify for disability, up to around age 65. Independently purchased contracts (i.e. something you bought yourself, not through an employer) will cost you roughly 3% of your income, and pay roughly 60% of your income if disabled. Disability is an often- overlooked type of insurance, because nobody expects to get sick or get hurt! But it happens more often than you might think.
Rummel Agency also provides worksite life insurance, which would pay $30,000 to my wife if I were to die. It’s a nice benefit that I am thankful for (I guess? I’ll be dead anyway!), but as you’ll see below, work plans are usually not enough to protect your family.
Most people have no idea what benefits are provided to them by their employer or how much they’re paying for them, because the forms are passed out in a flurry of documentation at the start of employment and then shoved into a desk drawer. If that sounds familiar, ask your HR department for an overview of costs and coverages. You can likely make new elections each year at open enrollment. You should also check your beneficiaries on any account that would pay a death benefit, because your situation may have changed since you first enrolled.
Life insurance is where things start to get interesting. A good life insurance strategy starts with determining how much coverage you need, and how long you need it to last. As for “how much”, your policy should 1) pay for a funeral; 2) pay off existing debts; and 3) provide replacement income for your surviving spouse and dependents. As for “how long”, it should last until your debts are paid off and your income no longer needs replacing. My wife and I both purchased $250,000 @ 20-year term insurance back in 2012. I have since become the primary income-earner, while she stays home with the kids. If something happened to me, they’d need substantially more than $250,000! So, in 2015, I added $1,000,000 @ 25-year term, which would cover me through age 55. The idea is by that time, our home will be paid off, we’ll have substantial savings and investments, and Social Security wouldn’t be too far away, so carrying life insurance would no longer be necessary beyond that time.
As for our kids, my wife and I decided that part of our own financial success includes setting up our children to build generational wealth, as well. I’m not talking about trust funds and deadbeat reality TV stars, but we do want to help pay for college (emphasis on help... more on that in a couple of weeks), and leave a legacy for our kids and grandkids to enjoy after we are gone. So when each child was born, we insured them with $100,000 whole life with 10-year payment schedules. Basically, we pay about $900 per child per year for ten years. The coverage is permanent and guaranteed to grow to a minimum cash value of $100,000 by their age 100. But with dividends and compound interest from getting the deposits in early, it projects to grow to significantly more than that over time. It seems weird to think about now, but these policies will probably benefit our grandchildren more than our children! Long after my wife and I have kicked the bucket, these policies will remain in force in a “paid up” status, collecting dividends and interest for several decades. When our kids expire, their kids will collect the death benefit.
As I’m writing this, I can hear the critics in my head: “But Marc, what if you took that $900 per year and invested it in an S&P 500 ETF and left it alone? Wouldn’t the historical returns suggest the compound growth net of taxes blah blah blah...” and yes, that may be true! But on the other hand, the $900 per year is a forced savings account that provides substantial barriers to keep us from tapping into it for an “emergency”. I will say that these life policies may be the lowest-priority item of our entire financial plan, and this strategy is not for everyone. But it makes us happy, so we did it! Over the course of the year, I'll spend $900 on much, much dumber stuff than this - and if you're being honest I am sure that you will, too. Plus, there is nothing preventing us from also opening an investment account on behalf of our children. In fact, as soon as my kids can legitimately show earned income (making them eligible for IRA contributions), we’ll try to "match" their Roths each year to boost their retirement plans - but that’s at least 10 years from now for us.
Finally, an estate planis not a form of insurance, but I think it is worth mentioning here since we’re talking about protecting what you love. I’ve referenced my wife’s health and personal situation a couple of times, and maybe that story is an email message for another day. For right now, I’ll just mention that even though we are (relatively) young, circumstances led us to create a revocable living trust, complete with durable power of attorney, healthcare power of attorney, end of life directives, and the whole nine yards. Regardless of your age, if you don’t have your wishes in writing, I strongly recommend you start working on it. I would be happy to recommend an attorney, or at minimum point you toward free templates provided by the State of Michigan to get started.
As always, write or call with questions. More to follow in a couple of weeks with Part II: Plan for Your Future.