Catastrophic Risk

Most people either guess (and guess low) or rely on a small policy through work. A simple way to size it honestly is the DIME method, which adds up what your family would truly have to cover if your income disappeared tomorrow:

• D — Debt Credit cards, car loans, and other debts, plus final expenses.
• I — Income Your annual income times the number of years your family would need it.
• M — Mortgage The balance it would take to pay off the home.
• E — Education What it would cost to get your children through school.

Add those up, subtract your savings and any coverage you already have, and you have a real number instead of a guess. (A common rule of thumb is 10–12× your income, but DIME is more honest, because it's built on your actual life.)

Here's where a lot of families get hurt. Some agents present themselves like financial advisors and sell universal life, especially indexed (IUL) or variable (VUL), as a tax-free retirement account. The pitch sounds great. The mechanics underneath are rarely explained.

The "tax-free income" comes from borrowing against your own policy. Those loans are tax-free only while the policy stays in force, because a loan is debt, not income. But the internal cost of insurance rises every year as you age. If weak returns, high fees, or the loans themselves outpace the cash value, the policy lapses.

And when a policy with an outstanding loan lapses or is surrendered, the IRS treats the gain as income. The taxable amount (loan balance plus cash value, minus the premiums you paid) is taxed as ordinary income, not the lower capital-gains rate. Worse, it's often “phantom income”: you receive a 1099-R and a tax bill on money you spent years earlier and never get back in cash, arriving at the exact moment the policy's value has evaporated.

With a variable policy (VUL), the cash value rides the market with no floor, so a downturn can drain it and trigger that lapse even faster. None of this makes these products "bad." Used correctly, for the right person, they can do real work. But a VUL is a registered security, sold by prospectus, and it takes a securities license just to offer one. As a fiduciary, our obligation is to show you the mechanics (loans, fees, lapse risk, taxes) before you sign, and to recommend a product only when it genuinely fits your life. That's the difference between advice and a sales pitch.

We insure our cars and our homes without a second thought, but the asset that pays for all of it, your ability to earn a living, usually goes unprotected. And the risk is anything but small: 1 in 4 of today's 20-year-olds will become disabled before they retire, according to the Social Security Administration.

A disabling injury or illness stops the paycheck but not the bills. Disability income insurance replaces a portion of your income so a health setback doesn't become a financial collapse. And if you're a business owner, related coverage can keep the business itself running. The policy through your employer, if you even have one, is usually far less than you'd actually need, and it disappears the day you leave the job.