Personal Finance Essentials
Does Batman Need Life Insurance?
A Simple Question
With a Not-So-Obvious Answer
You want to build wealth so you’ll have the money to live in financial security and comfort in the future. But it takes time to accumulate wealth, and before you do, unhappy events sometimes occur. Cars get into accidents and need to be replaced. Houses catch fire. You might incur big medical bills. And when people pass away, their passing can create a financial hardship for their loved ones.
If an unhappy event were to happen, how would you get the money needed to address the issue?
This is what insurance is for. It provides the money you’d need. But who needs insurance, and what kind of insurance do they need?
To help you answer those two questions, answer this one:
Does Batman need life insurance?
Yes
You said Batman needs life insurance. You’re probably thinking Batman needs life insurance because he engages in lots of high-risk activities – swinging from buildings on bat-ropes, fighting criminals and putting himself in constant danger. Batman could easily be killed by these activities, right? And that’s why you believe Batman should get life insurance. But this is the wrong answer.
Batman does not need life insurance – and to see why, click the NO button.
No
Correct! Batman does not need life insurance! There is one simple reason for this: Batman is Bruce Wayne – a billionaire. If Bruce were to die, his billions of dollars would go to his heirs, Alfred and his ward, Dick Grayson (Batman’s sidekick, Robin).
Although Alfred and Dick would be very sad if something happened to Bruce, neither of them would suffer financially. Since they’d incur no financial loss, there’s no need for Bruce to have life insurance – even though he engages in high-risk activities.
Can you guess who does need life insurance?
Who Does Need Life Insurance?
Homer Simpson needs life insurance because he’s the sole wage earner in his household. His wife, Marge, stays home to care for their three children, Bart, Lisa and Maggie. If something happened to Homer, Marge and the kids would be in severe financial peril – a financial crisis that Homer can prevent by obtaining a life insurance policy.
By the same notion, Homer should also have Disability Income insurance, in case he becomes unable to work due to illness or injury. The Simpsons should also have homeowner’s and auto insurance in case of damage to their home or cars.
You’ve just learned the most important lesson about insurance. It has one purpose: to protect against financial loss. Insurance can’t prevent your car from crashing, but it can protect you from suffering a financial loss if that crash occurs.
So, when trying to decide if you need to buy an insurance policy, just ask yourself one question: “If a particular unhappy event were to occur, would it cause a financial loss to me or my loved ones?” If the answer is yes, then you need to buy the insurance policy. If the answer is no, then you don’t.
How Much Insurance Do You Actually Need?
The amount of coverage you need depends on several factors: your income, how many people depend on it, how old your children are and what you want to provide for your surviving family. A common starting point is to think about how much income would need to be replaced and for how long.
Consider a 35-year-old earning $50,000 per year, married with three young children and a spouse who is at home full-time. If that person died tomorrow, the family would need to replace that income. A 20- or 30-year term policy with roughly $1 million in coverage would allow a surviving spouse to draw about $50,000 per year from the proceeds – enough time to get the children through school, find employment or make other plans. The exact number will vary based on your situation and your intentions. The important thing is that you make a deliberate decision rather than leaving it to chance.
Too often, people die leaving only a small policy they purchased years ago or whatever their employer provided. That $300,000 policy might sound like a lot, but stretched over years of living expenses, college costs and everything else, it goes quickly. Make sure the amount you carry reflects your actual obligations – not just what you happened to get by default.
Term vs. Permanent Insurance: Which One Is Right?
Term life insurance provides coverage for a specific period – ten, fifteen, twenty or thirty years – and is the most straightforward and affordable type available. If you are a young parent who wants to make sure the children can afford college if something happens to you, a 20-year term policy makes a great deal of sense. A 35-year-old woman in good health, for example, can find a $250,000 twenty-year policy for well under $200 per year.
Permanent life insurance, such as whole life, costs significantly more in the early years but is designed to cover you for as long as you live. It makes the most sense when the need for protection is truly permanent. Many families need both: a term policy to cover the years when children are young, and a permanent policy to protect a spouse over the long term.
The decision between term and permanent coverage is one of the more complex choices in personal finance. It depends on your age, your obligations, your savings and what you can afford today. There is no single right answer for everyone, which is why working with a financial professional makes sense here.
Should You Buy Life Insurance on Your Children?
Many parents are pitched life insurance policies on their children’s lives. It is worth thinking carefully before buying one. Life insurance exists to replace economic loss – income that would be lost if someone died. A child, in almost all cases, does not earn income. There is no paycheck to replace. So, in most situations, a separate policy on a child’s life is not necessary.
If you want some coverage for a child – perhaps to cover funeral costs in the unthinkable event of a loss – the most affordable approach is to add a “child rider” onto your own policy. These riders can cost as little as $50 per year and provide meaningful coverage without the expense of a standalone policy. That is almost always the smarter choice.