How much insurance is too much before you retire?
The greater your net worth, the more insurance you should buy.
After all, conventional wisdom states that insurance is the most expensive thing you can buy until you need it.
And then the tables turn at lightning speed.
Retirement risks to mitigate with insurance
Ever since the Great Recession, people have been more skittish with their money. It’s like that one big risk reared its nasty head and ever since people have taken risk more seriously.
Well, I’m here to tell you that risk really isn’t any different than it was before or even during the Great Recession. But that doesn’t mean you should take it any less seriously.
The thing is, the list of risks is long if you’re ending your career anytime soon.
- Health care
- Premature death
- Longevity (the more welcome side of the premature death coin)
- Interest rates
And that’s just to get the ball rolling. (Not trying to scare you, here.)
Beyond that, you may even need to reevaluate things like auto insurance once your net worth and liquidity grows by the time you retire.
I’m not saying you need to insure against all of these things, but they are risks to consider for your personal retirement picture.
Which risks should I insure against?
Every person is different, so I suggest a system to inoculate yourself against the risks that are most volatile for you.
Have parents, grandparents and great grandparents on both sides of your family that lived to be 100? You might want to think about longevity insurance when you retire or saving more money before you retire.
If you have a chronic disease like diabetes which you know will always cost you a ton in health care dollars, you might want to have some pretty great health insurance.
Whatever you’re thinking about, here’s a great three-step framework for figuring out what you should insure against.
- Identify your risks
- Prioritize your elephant-in-the-room risks
- Mitigate your prioritized risks to the best of your ability
Mitigating risks is where it really gets personal. Do you spring for an expensive no-deductible, no-copay umbrella health care insurance or work on getting healthier and bear more of that risk yourself?
Your risks are just that—your risks. The better you know yourself and your situation, the more you can bet on the right insurance setups.
But there’s a golden rule of risk mitigation:
The greater your net worth, the more insurance you should buy
There’s a practical reason for this, an insurance agent friend of mine recently told me why on the podcast.
And New York Times bestselling author Garrett Gunderson devotes an entire chapter to insurance in his book “Killing Sacred Cows.”
Anyway, here’s that practical reason: Especially for liability insurance, you have more to lose if you have a higher net worth.
My friend, Allstate agent Brian Certain, called out auto insurance as an example since people already understand it fairly well. And for comparison’s sake, the home you insure never hurtles along at 80 mph on the freeway.
Brian told me that if you get in a car accident that’s all your fault and your insurance doesn’t cover all of the costs—whether for bodily injury, property damage or what have you—your checkbook is on the line.
See, if you put someone in the hospital because of a wreck you caused, they sue you for putting them there. Not your insurance company.
However, your insurance is your surrogate checkbook—until their contractual obligations run out. But anything not covered by your insurance comes out of your pocket.
But here’s a real catch 22.
People don’t feel guilty about taking money from an insurance company, so if you have upper-tier insurance, you might become the target of a vicious lawsuit simply because they know suing you will get to your insurance.
Brian calls it the “tightrope between how much is enough and how much is too much.”
Walking the tightrope
Brian, an insurance agent for Allstate in Texas, suggests liability insurance that matches your net worth.
And that’s where it becomes extra important for people looking to retire.
Most people hit the wealthiest and most liquid portion of their lives as they enter retirement. So what would happen if, say, you cashed in your IRA the day before you got in a major car wreck?
All that liquidity could then be accessible to someone who can’t get enough money out of your insurance.
And that tightrope is what we call “risk management.”
If you can’t figure out where that line is between “I’m paying too much for insurance I’ll never use” and “If I have a catastrophe my retirement is reduced to bunk,” I suggest talking to an insurance professional.
Specifically, one you trust. It’s not worth spending $100 less per year if you could lose six figures to an agent selling you on the wrong product. (When disaster strikes, of course.)
And if you don’t like insurance agents, I’ve walked the road to retirement with a ton of clients who often question their insurance costs. So if you don’t trust your insurance agent, talk to a financial planner.
I help guide people toward their ideal retirement in numerous ways, and am sure I can help you figure out this risk management stuff a little better.
Question of the week:
Have you ever been underinsured? Over-insured? Tell me your horror story in the comments below and I might just share it on the air with thousands of listeners.
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