David H. Kinder, RFC®, ChFC, CLU
Myth #7: The Theory of Decreasing Responsibility
Updated: Jan 18
This is an interesting 'myth' because it makes a lot of common sense. If life insurance is always seen as a cost and if you can eventually avoid the cost... why wouldn't you want to avoid paying for something you don't "need" anymore? It's the same theory behind paying off your mortgage fast because you can avoid making those payments.
So what's the problem? Where's the myth? Look at the image at the top.
On the top left it says: "In the early years, you may need a lot of coverage." That's true. I always propose maximum total coverage - as much as 30 times their annual income so it will replace their income for their family.
On the top right it says: "In the later years, you better have money."
Here's a key thing to keep in mind: Math isn't money and money isn't math. That's why this is called a THEORY, rather than practical application.
What's missing from this scenario? 1. Disability: if you become disabled and can't work (and if you can't work, you can't earn and save money)... where will this money come from?
2. Unemployment: Does life go exactly as planned? Nope. What if you become unemployed and you don't have enough savings? Your wealth model stops growing.
3. Stock Market Losses: Where in finance does it say that "in order to make money, you have to risk losing money?" If you lose 50% in two months (like from September to November 2008), it can take YEARS just to get back to even! 4. Income increases: Just because your income increases does NOT mean that you don't need more coverage! In fact, you usually need (and want) MORE coverage to be sure that you can provide for your family at this ELEVATED standard of living.
5. Inflation: Inflation decreases your purchasing power. Let's put it this way, using the rule of 36, in 20 years, you need TWICE the money to provide the same level of protection as you have today. 6. Policy Benefits and New Developments: Typically, the life insurance industry is slow to introduce new innovations. However, in the last 10 or so years, there are new developments and agents gain new understandings on how to use life insurance in innovative ways. 7. You miss out on LEVERAGING your policy to provide benefits. Why bother paying for your retirement "dollar for dollar" when you can leverage your retirement and have those same dollars generate three or more? (Yes, you can do that through collateralization of your cash values.) Okay, that's not really a "needs" discussion, but a "wants" discussion.
Robert Kiyosaki (author of "Rich Dad, Poor Dad") taught that there are only three kinds of financial plans: 1. Plan to be Safe & Secure 2. Plan to be Comfortable 3. Plan to be Rich Now, no financial planner can help you be rich. You can be very comfortable and be well off, but a planner won't make you rich. I believe that it takes a business, invention, and/or substantial real estate (as a business) to become rich. But a planner can help you be "Safe & Secure". Term life insurance fits very well in that kind of planning. In planning to be Comfortable, cash value life insurance fits VERY well in that mode of planning. But in my biased opinion, there is always a need (or want) for life insurance - whether it's a protection need or a policy benefits need... there is always a need (or want) for life insurance. It primarily depends on the level of expertise that the agent is bringing to the client to help them make informed choices that feel right to them. As a side note - it is interesting that one of the fastest growing segments of life insurance sales... is a kind of policy called "final expense". These policies are a whole life policy for people who want to cover burial and other expenses... and issued to people at least age 50 and older.
If the "theory of decreasing responsibility" actually worked... why is this one of the largest and fastest-growing segments of life insurance sales??