Insurance: The Part of Financial Planning Nobody Wants to Think About
Most people avoid thinking about insurance until something goes wrong. For families with young kids and real financial obligations. That’s a costly mistake. Research consistently shows that families underestimate their insurance needs while overestimating their ability to absorb major financial shocks.
Bernheim and colleagues put it plainly: for most working families, the present value of future earnings is the largest asset they have, and most families leave it completely unprotected.
Life insurance: how much do you actually need?
The old “10 times your income” rule often falls short for growing families. It doesn’t account for debt, education funding goals, or your partner’s income. A better approach: calculate the present value of your lost income, adjusted for inflation and investment returns. This typically points to higher coverage than simple income multiples suggest.
Term life insurance provides better value for most families during their primary earning years. The investment component of permanent life insurance typically underperforms alternative investments after accounting for costs and fees. Permanent life insurance can make sense for specific estate planning situations, but for most dads with young kids, term is the right call.
Disability insurance: the coverage most dads skip
The Social Security Administration estimates workers have about a 25% chance of becoming disabled for at least a year during their career. That’s not a small risk, yet disability insurance is consistently the most underused form of family protection.
Most disabilities result from illness, not accidents. Group disability coverage through your employer typically replaces only 60% of income and often has restrictive definitions. It’s a starting point, not a complete solution.
The “own occupation” vs. “any occupation” distinction matters a lot. Own-occupation coverage pays if you can’t perform your specific job. Any-occupation coverage only pays if you can’t work at all. For professionals and skilled workers, own-occupation coverage is worth the extra cost.
Health insurance: getting the math right
High-deductible health plans paired with Health Savings Accounts offer real advantages for the right families. HSAs provide triple tax benefits: deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. Families who max their HSA and invest the funds long-term build substantial medical reserves while reducing current taxes.
The tradeoff is higher out-of-pocket costs when you need care. HDHPs work best for families with good health, adequate emergency funds, and the discipline to invest their HSA rather than spend it.
Home, auto, and umbrella
Many families carry inadequate homeowners insurance, particularly for dwelling replacement costs. Construction cost inflation often exceeds general inflation, creating coverage gaps for families who don’t update their coverage amounts regularly. Review annually.
For auto insurance, state minimum liability limits are almost always inadequate for families with meaningful assets. A judgment that exceeds your coverage limits can threaten everything you’ve built. Umbrella liability insurance adds protection beyond your auto and homeowners policies at relatively low cost, for families with moderate to high net worth, it’s one of the best values in insurance.
Keep it current
Your insurance needs change as your family grows and your assets accumulate. Annual reviews help identify coverage gaps and potential cost savings. Understand what’s covered before something happens, finding out after is much worse.
Good documentation makes claims go faster. A home inventory, photos of valuables, and organized policy records all help. A quick video walkthrough of your home is enough to establish what you have.
References
Belth, J. M. (2004). Life insurance: A consumer’s handbook (2nd ed.). Indiana University Press.
Bernheim, B. D., Forni, L., Gokhale, J., & Kotlikoff, L. J. (2003). The mismatch between life insurance holdings and financial vulnerabilities: Evidence from the Health and Retirement Study. American Economic Review, 93(1), 354-365.
Insurance Information Institute. (2023). Facts + statistics: Disability insurance. III Research Reports.
Social Security Administration. (2023). Disability benefits: SSA Publication No. 05-10029. SSA Publications.
Towers Watson. (2023). Global benefits attitudes survey. Willis Towers Watson Research.