The calculators often appear to be over the top in what they recommend, and while the clients’ views of how much they need are lower, I believe that they are usually over the top as well.
The reason for my different view is because clients have usually put themselves into very different circumstances than the readers of this blog would aim for.
The typical consumer view
To illustrate my point, let us use the example of a typical consumers, Billy and Wendy Spendalot, who find themselves in the following circumstances:
- The Spendalots have borrowed as much as they could for their enormous house way out in the suburbs, Billy’s completely unnecessary Mercedes Benz and Wendy’s ridiculous SUV, their luxury holidays that they can brag about on Facebook and other ludicrous purchases;
- Wendy doesn’t work, not because she is raising children (they are all in high school), just because she wants to stay at home and sip martinis with the other mums of their fancy neighbourhood;
- The Spendalots have a typical high-consumption lifestyle, eating out five times a week, commuting massive distances from their luxury home to Billy’s job in the city, and sending the kids to an overpriced private school;
- The Spendalots have no money left over to build a savings buffer, but that’s OK because Billy is getting a raise next year;
- The Spendalots live unhealthy lifestyles and don’t look after their physical health (must be all of that takeaway food they are eating and the stress from Billy’s job). Doctors should be able to fix anything that goes wrong though.
Because of the above circumstances, the Spendalots are then exposed to the following possibilities:
- If Billy dies, the family will be destitute immediately because they won’t have any savings to live off, and they will be forced to sell the house immediately as Wendy won’t be able to afford the repayments because she does not earn enough to replace even two thirds of Billy’s salary. There will also be no equity because they keep borrowing against the equity to pay off credit cards. The solution: Get a huge amount of life insurance, that way Billy can sleep at night again. The premiums go on the credit card anyway so they won’t hurt at all.
- If Billy is injured and unable to work for two months (e.g. he breaks both legs in a car accident), his family will be destitute within a month. The solution: Get an income protection (a.k.a. salary continuance) insurance policy that replaces Billy’s salary after only 30 days. They’re very expensive for the industry that he works in, but the premiums go on the credit card anyway so they won’t hurt at all.
- If Billy is totally and permanently disabled (e.g. Billy has a stroke from his severe obesity brought on by his unhealthy lifestyle and cannot work any more), his family will be destitute because they don’t have any savings to live off. The solution: Get a huge amount of Total & Permanent Disability (“TPD”) insurance. The premiums go on the credit card anyway so they won’t hurt at all.
I have a completely different view in relation to these insurances, as we find ourselves in the following circumstances:
- We didn’t borrow anywhere near as much as we could for our house, and paid down the debt as quickly as possible;
- We have no debt, other than on an investment property that pays for itself;
- We have transitioned to a low-consumption lifestyle;
- We have a buffer that would easily cover three months of expenses;
- We live relatively healthy lifestyles, aren’t overweight, don’t drink to excess and do not have any health problems.
Because of our very different circumstances to the Spendalots, our insurance situation is as follows:
- If I die, I have life insurance for the sum of $600k, which comes at quite a low cost given my age. This is a sum that is supposed to provide an income for my wife and kids to live off and supplement the income that my wife would receive from working part time. As we accumulate more wealth, this amount will be scaled back.
- If I am injured and unable to work for two months (e.g. I break both legs in a car accident), my family will be absolutely fine as we have more than enough savings to get us through three months of living expenses. We therefore have a dirt-cheap income protection insurance policy that only pays out after 90 days, which is why it is so cheap.
- If I am totally and permanently disabled (e.g. I become a quadriplegic from a car accident), my family will receive a payout of $600k from my total and permanent disability (“TPD”) insurance policy. The policy costs a similar amount to my life insurance policy because of my good health and young age, and will be scaled back as we accumulate more wealth.
Change your lifestyle and you quickly change your need for insurances
As you can see, if you change your circumstances, your need for these insurances is completely different to that of the typical consumer. You then face insurance premiums that are a fraction of what you would otherwise pay, therefore further accelerating your accumulation of wealth.
So if you’re diligent enough to be on the path towards FI (which I’m sure you are if you’re reading this blog), then you will be able to avoid the cliched requirement for excessive risk insurances. This will mean that you won’t need to spend a fortune to insure yourself against a situation that you would have created through your own excessive consumption.
Maybe now is a good time to review your insurances?