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The Danger of Being Underinsured

The Danger of Being Underinsured

Life insurance. My father always had a life insurance policy. My mother had one as well. And even when I was young, my parents always had a policy on me.

There were some smarts about that and some not-so-smarts, I’ve come to learn. The specifics of that might be for another article.

But in general, as Martha would say, life insurance is a good thing.

However, it’s not enough to simply have life insurance. You need to have enough.

I’d say I learned that the hard way, but I really didn’t. I knew that, from enough years of reading many, many financial books and listening to financial gurus.

I guess what I did learn the hard way was to take nothing for granted. Ever.

Underinsured: my personal story

My husband, Steve (who has since passed away), and I had purchased a plot of land in Wisconsin in 2006, more than a year before we were to be married. For most people, I’d say buying land without any formal “partnership,” whether that was a business partnership or something more personal (aka, marriage), is a dumb idea. But Steve and I were already engaged and so in love and dedicated to each other, it worked out. I still don’t recommend it — even if you think you are that in love. Simply put, we were lucky.

But what I realized after we bought that land and built a vacation house to rent on it was that our life insurance policies would no longer be enough to cover the expenses of both homes should one of us die. In fact, when I crunched the numbers, I saw that the payout wouldn’t even be enough to cover the expense of just one house.

So I spoke to Steve about it. I had a $250,000 policy on myself, and he had the same amount on him. We both agreed that we needed to up the amount to $500,000 a piece. I told him I would take care of my policy, and asked, could he take care of his? He said he would. We had already made sure that he was the beneficiary of mine, along with the kids, and I was the beneficiary of his.

And then, in 2013, Steve was diagnosed with cancer. Moving into the following year, we were filing for bankruptcy. As part of that process, I had to gather every single little bit of paper I had to prove both our financial debt and our financial worth.

It was embarrassing. When asked about money by the bankruptcy attorney, I could give “ballpark” amounts of worth and debt, but nothing specific. While assured that I wasn’t alone, I felt ashamed to be that unknowledgeable about my own finances. I should have been much more on the ball, I thought, especially since I was the one who paid the bills each month.

I was still gathering and doing the bankruptcy paperwork when we entered Steve’s “isolation” period following his stem-cell transplant. In the extended-stay hotel room, I sat at the desk that had become my new office, and I went through our receipts, statements, and policies. Then I came upon Steve’s life insurance policy.

I sat staring at it, and puzzled, I crinkled my face. This can’t be right, I thought.

“Steve, is this the life insurance policy?” I asked.

“That’s all I’ve got for it,” he said. Steve was, admittedly, meticulous about keeping paper records — even if he didn’t personally know what was in them.

“Hmmmmm… It says $250,000 for the payout.”

“Yes, that sounds right.”

“Steve,” I said, rather firmly, “We talked about this. Remember?”

Steve never had a good memory. We always chalked it up to too much pot use during the ‘70s. For that reason, his biggest fear was that he was going to have Alzheimer’s in his later life, just as his father did. Sadly, he didn’t live long enough to find out.

He didn’t remember. Fairly upset, I proceeded to remind him.

“Steve, we talked about having to raise the payout amounts to $500,000. Remember? To cover the debt on the homes,” I said. Once reminded, he did remember.

“I raised mine to $500,000 that same week!” I continued. “You never did?” I asked again, still hoping that somewhere, there was a policy hidden in the pile of papers that had the increased payout.

“I forgot,” he said sheepishly.

I looked back at the paper and took a deep breath. “Gee, Steve… You’ve left me high and dry.”

“I’m sorry.”

At that point, my selfishness gave in to my empathy. “Oh well. It’s too late now,” I said. It really was. With Steve sick, there was nothing more we could do. “Let’s just hope I never have to use this, right?”

“Right,” Steve affirmed.

Unfortunately, I did have to use it.

The ramifications of being underinsured

We lost the Wisconsin house to the bankruptcy, but the Illinois house passed through. However, as large as $250,000 might sound, the payout was not enough to pay off the mortgage. I tried for a year to continue to pay the mortgage on my income alone, and I just couldn’t do it without constantly dipping into my savings.

It became crystal clear — and quickly — that I had to act, or I’d lose everything in just a matter of a few years.

So I downsized. I bought a townhouse outright with the money I had left, and I’m forever grateful for that. But a better scenario would have been to buy out the house we had for a decade and retain the equity in that. I tried to sell it after we moved, but in the midst of a still-downturned economy, and on the advice of my bankruptcy attorney, I walked away and allowed it to go into foreclosure.

I thought about this the other day as my daughter asked me what happened to Steve’s life insurance. I smiled, lifted my hands toward the ceiling, and said, “You’re living in it.” Without a doubt, it’s still a blessing to have a paid-for home (and car, for that matter). I still struggle on my single income, but now that the kids are older, they are both able to help contribute to the financial expenses of the household.

But I write this as a warning to you, my reader. Life is unpredictable. You might feel young and invincible. It might seem like death is a long way off. But the truth is that we don’t know when death will show up. It arrives like a thief in the night, when you least expect it.

And when you do consider life insurance, don’t forget to also consider the state of your loved ones after you are gone. Covering your burial expenses alone is not enough, and guess what? Those expenses are probably greater than you think. Beyond that, there is credit card debt, the mortgage, rent, utility bills. You’ll no longer be able to help with these expenses. Even if your spouse or children work, imagine how difficult working might be when going through the very real and difficult emotions brought on by a loss as huge as the death of a loved one.

The necessity — and certainty — of life insurance

If you don’t have life insurance, get it.

And when you get it, make sure it’s TERM life insurance, NOT universal. Life insurance is a guarantee that your loved ones will be taken care of financially after your death. Life insurance is NOT a savings account, and when it’s used like one, despite what your insurance agent might say, it’s a horrible investment tool. (This is a large part of the “smarts and not-so-smarts” for another article.)

If and when you do have life insurance, consider the following when discerning an adequate and necessary death benefit:

  • The amount it would take to pay your funeral expenses (Steve’s, in 2014, cost about $12,000 for a wake, burial, and other funeral expenses.)
  • The amount it would take to pay all of your current debt, including your mortgage. You don’t want your estate to have to pay a cent for any of this.
  • The amount it would take to help your family (spouse and children) to live without fear of future debt or unpaid bills for at least one full year (longer if you can afford to do so).

Keep this in mind: Your family has a right to grieve the loss of you in peace without worrying about any of the above financial burdens.

I’ve actually decreased my insurance now. I just don’t need that much anymore. But it still is an appropriate amount. It will help my children pay my burial expenses. It will also help them get through the grieving period and keep them moving forward independent of my financial support. I will still be helping them — from beyond the grave.

Of course, we never want to use life insurance, but the truth is, that’s the one thing, along with taxes, that we can be sure of. Someday, someone we love will cash out our life insurance policy. That’s for certain.

Just make sure it’s enough.