Not a Financial Loss

Jonathan Clements

DON’T CONFUSE THREATS to your happiness with financial threats.

For instance, it would be devastating if one of your children died at a young age, and no doubt that’s why some folks buy life insurance on their children’s lives. But while the death of a child is a threat to your happiness, is it a threat to your finances? It’s terrible to say it, but just the opposite is true: You’d probably be better off financially. You’d no longer have the cost of raising the kid and putting him or her through college—and thus buying life insurance on a child’s life makes little sense.

Similarly, dying early in retirement would be an unhappy occurrence. But would it be a blow to your finances? Again, just the opposite is true. At that point, all your financial troubles would be over. The fact that you’d delayed claiming Social Security, took pension payments rather than a lump sum, or bought immediate fixed annuities wouldn’t matter to you—and yet folks often say that fear of an early death is the reason they claimed Social Security at age 62, took the lump sum pension payout and avoided immediate annuities.

To be sure, such steps would leave your heirs wealthier. But remember, even without such steps, your early death would likely give a notable boost to the net worth of your heirs. After all, you won’t have spent much of your retirement savings, plus your heirs will get access to that money, plus your home’s value, earlier than they might otherwise have expected.

That brings me to two more examples: extended warranties and trip cancellation insurance. Obviously, it would be upsetting if you dropped your iPhone or you had to cancel your next vacation. But while these might make for a bad day, they wouldn’t be a huge financial blow. In fact, if you had to cancel your next trip, you might lose most of the airfare, but you’d probably dodge the cost of hotels and meals out, so you’d be better off financially than if you had taken the trip.

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