I meet a lot of people who have expectations that are completely unrealistic, and it makes me wonder where they got their life pictures. Why would a woman who has just graduated from university and hasn’t even got a good job yet think it’s okay to have a baby, buy a house, and throw herself a big wedding? Why would a young couple believe that the beautiful house they bought (that they could barely afford) isn’t good enough and buy a bigger one? And when did the kind of car we drive, the clothes or shoes we wear, or the neighbourhood we live in become such a reflection on us that we’re willing to pretend things are fine when we’re neck-deep in debt?

We’ve grown up with more STUFF than has ever been available before for consumption. TVs get bigger and flatter with better resolution and more fabulous sound. Houses get bigger, with more bedrooms, bathrooms, kitchens. Cars get fancier (I want the one that knows how to parallel park itself!) with leather seats, in-car communications, and more cup-holders!

With all the STUFF just waiting to be bought, the question becomes this: Are you really willing to spend whatever it takes to have it all right now, regardless of the impact on your financial health?

It may be that the lifestyle you have, or want to have, is shaped by what you had when you lived with your parents. Their hard work made it possible for you to grow up in a house, and you can’t imagine living in anything but, despite the fact that you haven’t saved a downpayment. For while it took our parents 10 or 15 years to come up with the money to get into a house, many of us think we’re entitled RIGHT NOW.

Unless you come out of school earning as much as your parents, with the savings to back it up, you can’t buy the same lifestyle they had. Putting yourself into debt and not leaving any money for savings mean you’re setting yourself up financial failure.

I meet a lot of people who want to indulge their every whim either because they were indulged as children and it’s their norm, or because they weren’t and it’s their due! Talk about no way out. Delusional Debtors can always find a good excuse for spending money. That’s a no-brainer. The fact that we’re spending money on credit – spending money we haven’t yet earned – is down-right dopey, particularly when it’s for consumables. Sure, that $200 dinner was great. But once you go home and have a good poop, all you’re left with is the debt on your credit card.

And then there are the people who spend money they know they shouldn’t, experiencing buyers remorse and slapping themselves upside the head for being stupid… who then go out and do it again. What will it take to stop?

It may take revamping the picture you have of your life. If you have painted a picture for yourself that you simply cannot afford, it’s time to paint a new picture – one that  you can feel good about.

It’s lovely to think that a beautiful home, a late-model car, and a cottage, boat, basement full of entertainment equipment is ours for the having, but the reality is that for many people our grasp exceeds our reach. I can’t afford that car that parks itself and I know it. To go out and lease one would mean I’d have to scrimp in other areas – most likely on my saving and my emergency fund – and I’m not prepared to do that.

Ditto an annual vacation. While it’s a lovely idea, and it may be hard to watch others head south while I’m stuck shoveling snow, the reality is putting it on credit isn’t an option for me. So I’ve painted myself a picture that includes a family vacation somewhere wonderful about every three to five years, depending on how I’m doing financially. I save up the money and come back with no regrets.

So, what pictures did you paint that are getting you iton trouble? What did you imagine your life would be like, only to wake up to some hard realities that have you scratching your head? And how do you feel about having to change your expectations? If you aren’t willing to revamp your picture, how are you planning to make it work?

Perhaps the hardest part of taking control of our money and our life is the first step: honesty. We must honestly look at the picture we’ve built and the impact it’s having on our financial stability. If we’re balanced and in a good place then the picture’s a keeper. If we have debt, no savings, no EF, no insurance or worry about paying the hydro bill on time, it time to get out a fresh canvas and start painting a new picture.

You’ve probably heard me say this before; it’s one of my mantras: Plan like a pessimist so you can live like an optimist.

Very often people go through life believing everything is always going to be great. In their world, crap doesn’t happen. No one loses jobs. No one gets sick. No one dies. It’s la-la-la, and off to the mall we go because we’s gots money and they’s shoppin’ to be done.

Sadly, there’s a very real possibility that crap will happen. According to the Society of Actuaries and the national Centre of Health Statistics and Transactions (big title… must mean their know their stuff, eh?) every year one in eight people become disabled. And at age 35, the claim incidence is three times greater for women than for men.

According to the American Cancer Society, in 2008 over half a million people died of cancer. Never mind all the people diagnosed who watched their income shrivel as they coped with their treatments. And while The Big C is the thing we are most fear, the incidences of death by heart disease are higher; 1 in 5 (compared to 1 in 7 for cancer).

Here are some more:

• Stroke Lifetime Odds: 1 in 24
• Motor Vehicle Accident Lifetime Odds: 1 in 84
• Suicide Lifetime Odds: 1 in 119
• Falling Lifetime Odds: 1 in 218
• Firearm Assault Lifetime Odds: 1 in 314
• Pedestrian Accident Lifetime Odds: 1 in 626
• Drowning Lifetime Odds: 1 in 1,008
• Motorcycle Accident Lifetime Odds: 1 in 1,020

Among my immediate friends and family, I have lost dear ones to cancer, suicide, car accident, drowning and a motorcycle accident. I know people die. I can die too.

If you know that crap can happen then you should take the steps to ensure that if it does you and your family are adequately protected. Just worrying about the anvil falling on your head is a waste of energy; using that image to motivate you to plan for the worst – to plan like a pessimist – means you can stop worrying because you’ve done all you can. You’ve got your safety net. Time to have fun!

Every step you take, from building an emergency fund, to buying enough insurance, from saving money for the future to executing a well thought-out estate plan, gets you closer a place where you don’t have to worry.

If it’s been a while since you looked over your financial life, today’s the day to make your checklist and get busy putting your Pessimist’s Plan into place so you can forget about the yuckies and live like an optimist:

• Check credit report; fix errors
• Review savings goals; chart progress.
• Establish/review emergency fund goals; chart progress.
• Review life, health, disability insurance coverage; supplement if necessary.
• Update resumé. Plan for your next job review.
• Review your estate plan: wills and powers of attorney, along with guardianship designations for your children.
• Review Debt Free plan; chart progress
• Set a new goal for increasing your financial knowledge. The more you understand about how money works, the less you have to worry about it.

Once you’ve got all your ducks in a row, you need only do a periodic review to see that you’re still on track.  Semi-annually, or each time there’s a significant change in your circumstances, you can go over your checklist and make sure everything is still ticketiboo. Or you can make the changes you need to put things back in order.

Then you can forget about worrying. You’ve done all that you should, and worrying isn’t going to make a scrap of difference. Get busy being happy.

Director Nathalie has a first job; she’s a classical harpist. And boy is she good. So one day I arrive to set and Nats wants to talk about what she should do with her insurance on her harp. It’s costing her almost $500 a year, and after listening to me prattle on about cutting costs, she things this may be a cost she’ll cut. Whoa there Momma.

First I ask what it would cost to replace her harp. About $16,000 she say. Okay, say I, so do you have $16,000 in the bank to buy a new harp right now? No, she shakes her head, a little stunned at the question. Then you definitely SHOULD NOT cancel your insurance.

I explain to her that when she buys insurance on her harp, she shifting the risk for taking care of a disaster from herself to the insurance company, and the $42 premium she’s paying is the cost of the insurance company accepting that risk. Huh?

Well, let’s say you decided to self-insure, which was what she was proposing. If the harp broke in 2 years, she would have $42 x 12 x 2 – $1008 saved in her self-insurance pool.  How would she come up with the other $15K?

Most people would just put it on credit. Credit has made insurance seem like a useless product because people have, to a large extent, had an endless supply of money available to solve any problems. But credit shouldn’t be used as insurance since the cost in interest if far higher that the insurance premium.

So how long would it take Nats to come up with the full $16K if she were banking her $42 a month premiums? 381 months, or almost 32 years! So for 32 years, she’d be at risk, having to cover the cost of the new harp to some degree, when for $42 a month she wouldn’t have to think about it.

Every time she loaded that sucker into the car – which she does fairly often to get her gigs – she would be worried sick about what she was going to do to come up with the money to replace it if the worst happened. Ditto every time she arrived home and had to unload it.

That’s a lot of worrying. And that’s exactly what insurance is designed to do: eliminate the worry.

Insurance has a bad rap. If you make a claim, they raise your premiums. They put you through the ringer because they don’t want to make a payout. There are even stories about life insurance companies not paying out when the body insured actually drops dead. Com’on, do I have to drop the body of at head office to get the money?

Companies sometimes forget that the purpose of their existence is to produce what they’re producing. Car companies make cars. Shoe companies make shoes. Insurance companies create peace of mind by offsetting risk. What we’ve seen since the early 1980, is a shift in companies’ focus from doing their jobs to “meeting shareholders’ expectations” Hey, people who invest shouldn’t have any “expectations,” and shareholder expectations should NEVER stand in the way of dealing with every single customer as valued and respected. So whenever people are badly treated by any company, be it a little thing, or a big thing, they should bray it all over, tell everyone, and stand in the store and shout it at the tops of their voices to warn the other would-be customers.

But you also can’t paint an entire industry by the bad behaviour of a few players. There are reputable insurance companies who take their jobs seriously and make sure their clients receive the services they’ve paid for.

And we should do the math before we decide that insurance is just money down the drain. If Nathalie never has the need to buy another harp because she dropped hers, she should say, “thank you” for not having to deal with that stress.  In the mean time her $42 a month has bought her years of piece of mind and a sense of safety. Money well spent.

Based on my last post on life insurance and buying it young, I don’t think people have any idea of how inexpensive it can be. I’m going to use the example of $300,000 in insurance on a man (since they’re more expensive) who doesn’t smoke. If you were to buy a 20-year term policy, protecting your family from age 25 to 45, the premium would be only $287 a year, or less than $24 a month. Hey, we’re talking a case of beer here. But wait until you’re 39 to buy the same policy and your costs go up to almost $400 a year, which isn’t exactly a budget killer, unless you want a permanent insurance policy. Then the difference in the numbers is more significant. Buy a permanent policy at 25 and you’ll pay about $1645 a year or $137 a month. Wait until you’re 39 and the price goes up to $3025 a year or $252 a month. 

I’ve received a few questions recently about whether term insurance is better than permanent (whole life or universal) insurance. Whether you buy “term,” “whole life” or “universal life” insurance will be dependent on two primary factors:

• the amount of insurance you need, and
• how long you need that insurance to be in place.

Term insurance provides protection for a predetermined period of time (perhaps 5, 10, or 20 years) or until a certain age. However, many term insurance plans end at a specific age, such as 65, 70 or 75 With men and women living considerably past that age, if you’re looking for longer-term protection, term insurance won’t cut it.

With term insurance, when the term of the contract expires your coverage ends unless you renew the term. Each time the term is renewed, the premium is adjusted upwards. So on the term policy above for the guy who bought a 20-year term at age 29, if he needed to renew for another ten years, the premium would jump from $304 to $552.

Think of term insurance as an expense, like rent. While it will give you comfort and peace of mind, it accumulates no residual value. If you want coverage to last your lifetime or want to use insurance to build assets, term insurance isn’t the right choice.

Term insurance is cheaper than permanent insurance, but that’s because the statistics are in favour of the insurance company with term insurance. With permanent insurance the company is going to have to pay out, it’s only a matter of when.

Whole life and universal life insurance are permanent, remaining in place until death. With whole life policies, the insurance company does the investing. (People debate that they don’t do a very good job of it, but they are purposely conservative, and with the recent swings in the market, you can see why.) With universal life, you have much more control over the types of investments the money is going into.  The premium is generally the same for the life of the policy, so the annual cost can be low if taken early in life (when the risk of death is low), or very high if taken late in life. If term insurance is rent, then permanent insurance is a mortgage payment; in the early years there isn’t a lot of asset accumulation, but over the long term the pot will grow nicely.

Most whole life policies have a “reserve,” which can be refunded if you cancel the policy before your death. This reserve is referred to as the cash value of the plan. You can also borrow against this cash value at an interest rate set in the policy. However, if you haven’t paid it back, the money owed will be deducted from the death benefit.

So, back to the question, “What kind of insurance should I buy?” The best place to start is with the amount of coverage you need. Let’s say you’ll need $125,000 to pay off your mortgage, $5,000 to cover your funeral expenses, $15,000 to cover legal and accounting bills, and an additional $100,000 to cover the capital gains your estate will be hit with. All told, you’ll need about $245,000. Buying a policy with a lower payout clearly won’t serve your needs.

The next thing to look at is how long you’ll need the coverage. Some of your needs may be short-term. Declining term insurance is often the most cost-effective way to cover mortgage debt. On the other hand, the need to meet your funeral expenses and minimize the tax hit on your estate is permanent. So permanent insurance will be your best bet here.

Remember, since the premium on your permanent insurance will remain the same, while the premium on term insurance will rise each time the policy is renewed, the cost of term insurance will appear far less expensive in the early years of a policy. Compare the lifetime cost of both types of policies (remember to compare similar features and benefits — apples and apples), and then make your decision.

Another interesting fact: with some policies, you can buy the right to convert your term policy to a whole life policy at a later date. So if you decide to start off with term insurance to protect your young family, and then decide to convert to a whole life policy when your needs change and you have more money, your health won’t be a factor in setting the premiums. However, your age will be and the older you are the more your insurance will cost.

Shop around when looking for life insurance. Get several quotes, make sure you’re comparing apples with apples, and buy the policy that best meets your needs. Resist the urge to over-buy, but don’t sell yourself, and your family, short either. Evaluate your future earning potential and your family’s ongoing needs realistically, take inflation into account, and then buy enough insurance to meet your needs.

BTW, if you’re looking for information on how much insurance you should buy, go and read How Much Insurance. 

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