Assessing Your Insurance Needs: A Strategic Approach
Insurance decisions shouldn’t be driven by fear or sales pitches—they should be grounded in cold, hard financial logic. At Muhlenkamp, our approach to insurance is simple: “The purpose of insurance is to protect against financial disaster. Any non-financial loss cannot be remedied by insurance. Any loss that is not a disaster does not require insurance.”
This philosophy cuts through the noise of complex insurance products and expensive policies you don’t need, focusing instead on what truly matters: protecting your family’s financial future when it counts most.
The Financial Disaster Test
Before evaluating any insurance product, ask yourself three critical questions:
- Would this loss create a financial disaster for my family? If your car needs a $500 repair, that’s inconvenient but probably not catastrophic. If the primary breadwinner dies unexpectedly, leaving a mortgage and three children behind, that’s a financial disaster requiring protection.
- Can this loss be remedied with money? Insurance can replace lost income, pay medical bills, or rebuild a destroyed home. It cannot bring back a loved one or restore health—those are nonfinancial losses that no policy can truly address.
- Would I be financially unable to handle this loss from my own resources? As your wealth grows, your insurance needs typically decrease. The millionaire doesn’t need the same life insurance coverage as the young parent living paycheck to paycheck.
Life Stage Assessment: When Your Needs Change Dramatically
Your insurance requirements evolve as dramatically as your life circumstances. What protects you as a single professional may leave you dangerously exposed as a parent, while coverage that made sense during your peak earning years might be excessive in retirement. At each stage, consider what insurance needs protect you from disaster, and pursue those.
- Young Families: Maximum Exposure, Maximum Need
Young parents face their highest financial vulnerability—significant obligations with limited accumulated wealth. Consider the need for life insurance to cover the lost income that pays the mortgage, childcare costs, and college education for multiple children. Don’t overlook the non-earning spouse; replacing childcare, housekeeping, and family management services has substantial economic value. - Empty Nesters: Rightsizing Coverage
This is the time to reassess: are you paying for coverage you no longer need? Do you need policies, like long-term care coverage, that weren’t a priority before? - Retirees: What Protection, If Any, Is Needed
Are there disastrous circumstances that can devastate retirement savings and leave you financially unable to handle day-to-day expenses, long-term care needs, and final expenses?
The Investment Component Trap
Be particularly wary of insurance products marketed as investments. Whole life and universal life policies typically deliver returns 2-3% below what you could earn in corporate bonds, while reducing the actual insurance protection available. If you need life insurance, buy term coverage. If you need investments, buy investments. Combining them usually serves neither purpose well.
Your Action Plan
Schedule an annual review, particularly after major life events: marriage, divorce, births, deaths, job changes, or significant purchases.
Remember: the cost of being “underinsured” can devastate your family financially and emotionally. But excessive or inappropriate coverage prevents you from achieving other important financial goals. Strike the right balance by focusing on true financial disasters, and your future self—and your family—will thank you for both the protection and the peace of mind.
The opinions expressed are those of Muhlenkamp and Company and are not intended to forecast future events, guarantee future results, or offer investment advice.
Investing involves risk. Principal loss is possible.
