Since her early 20s, Danica Patrick has driven a racecar for a living, speeding 200 miles per hour around a crowded track bordered by concrete walls. It’s dangerous. Really dangerous. And she recognizes that.
“There are things that happen in the car that you can’t plan for and that are out of your control, like a tire blowing on you or an engine blowing up or a crash that happens in front of you or someone hits you,” Patrick told me in a recent interview. “So no matter what your skillset is, those things just happen. Absolutely it is a risk.”
But it’s a risk that she has chosen to manage, in part, with life insurance. Patrick has owned life insurance since she started racing, and the subject is important enough to her that she now advocates on behalf of Life Happens, a nonprofit founded to help consumers make smart insurance decisions.
Commendable though it sounds, I wanted to know more about why. Why was she motivated to buy life insurance at an age when most people don’t even think about it? Why did she feel she needed life insurance—then and now?
Why was Danica Patrick so motivated to buy life insurance at such a young age?
The risks inherent in driving a racecar for a living aren’t lost on the racing community. Much like for those entering the military, it’s become a rite of passage to grab some life insurance before hitting the track. But for Patrick, it was also more personal.
The decision came naturally because her parents were proponents. Each had lost their fathers during childhood, and witnessed the financial strain it put on their respective families. They recognized the risks inherent in running a household and they did something about it. They managed the risk, and not only with life insurance. “My mom and dad always made sure that on top of having life insurance from a young age, they [also] had six months worth of money in savings,” says Patrick.
As a parent of young children myself, I was curious to know how Patrick’s parents articulated these lessons of financial responsibility. It must’ve been some speech! Turns out it wasn’t that at all. “I don’t think they necessarily told me I should get it,” she says, “but I was always led by example.”
Kids prove wiser than their years would suggest, despite scaring the pants off us parents, and studies have confirmed as much. They focus more on our actions and our example than our words. They’re watching, moms and dads, and they are like little reconciliation machines, matching our actions to our words to see if they’re consistent.
Why does Danica Patrick need life insurance anyway?
Personally, I’m not a believer in arbitrarily buying life insurance (or any type of insurance, for that matter). There’s a policy out there for most of our deepest fears, but many of them are unnecessary or redundant. I wanted to drill down on this idea with Patrick, and she articulated the big picture “why” beautifully. She said she didn’t want to “leave people with bills they can’t pay, and not only dealing with the sadness of a loss, but trying to figure out how you’re going to manage the rest of…life.”
That’s it—that’s the big “why” for life insurance. Life is hard enough as it is. Suffering the loss of a loved one before their time is tragic and traumatic. Life insurance frees us to process personal loss without adding financial stress.
But let’s get more specific. In my book, Simple Money, I define “life insurance needs” as those that would help ensure a family’s standard of living is maintained even if it has suffered the loss of a loved one.
Life Insurance Needs:
- Payment of final expenses
- Repayment of debts and mortgages
- Funding expected educational expenses
- Funding replacement of household duties
- Replacement of lost income
While you may benefit from getting more detailed than the preceding list, pinning down an estimate of what it will take to insure each of these needs doesn’t have to be overly complicated. Most families will be well served by purchasing a term life insurance policy with a death benefit that is approximately 15 times their annual income.
It’s not as arbitrary as it sounds. An amount 15 times your income, conservatively invested, should recreate 60% to 75% of what you bring home should the unthinkable occur. But even if a household contributor isn’t paid for his or her work inside the home, $250,000 of life insurance will help provide $30,000 to $40,000 of annual income to help keep things running smoothly for seven to 10 years. (You might want more if your children are many or particularly young.)
Yes, I said term life insurance, specifically, because the above life insurance needs should presumably expire assuming that a family is on track to reach financial independence somewhere near retirement age. So the specific term of your policy—whether it’s 10, 20 or 30 years—should last at least through the kids’ college years and at most through the age at which you can reasonably expect to be financially independent.
But surely these same needs don’t apply to one of today’s foremost faces of big-time racing! Not so fast, says Patrick. “Those bills don’t pay themselves, so—especially early on in my career—I was buying and consuming, and the money didn’t stockpile until later.”
At the beginning of her career, Patrick needed life insurance. But she still wants it today, even if she doesn’t “need” it. To those fortunate enough to have sufficient personal assets so that financial need doesn’t necessarily apply, there are some valid wants. For example, having a small layer of life insurance provides some (nearly) instant liquidity if it wouldn’t otherwise exist. But there are other good reasons that some people may want life insurance.
Life Insurance Wants:
- Creating an estate
- Funding charitable bequests
- Replacing an estate lost to taxes
- Building cash value
The nature of these wants generally requires some form of permanent life insurance—like whole life, universal life or variable life. But be forewarned: permanent life insurance introduces an intrinsic level of financial complexity and can be very expensive.
I believe funding life insurance wants through permanent insurance should only be considered if all financial priorities have already been met, which for most households won’t be the case until its income exceeds $250,000 annually or net worth is in the millions (plural).
Don’t forget a will!
Once you know why life insurance is important for you, it becomes a great deal easier to make life insurance decisions. But please don’t forget that life insurance provides only the funding for your wishes; it’s the work of estate planning to actually articulate those wishes (most often in a will), ensuring that the assets you leave behind are a thoughtful blessing, not an overwhelming burden.
And please don’t be naïve enough to think that none of this applies to you. If you have a spouse or minor children, you have loved ones relying on you financially, either completely or partially. Regarding cost, you don’t need a Go Daddy sponsorship to afford life insurance—term can be surprisingly inexpensive. And you don’t have to be a racecar driver to address one of life’s most common risks—transportation in a motor vehicle.
As Patrick observed, “It’s probably pretty uncommon to come across someone that hasn’t been in some kind of a car accident. Now, there are surely varying degrees, but you’re not wearing a six-point harness with a helmet on and an ambulance sitting nearby. So, it’s a risk no matter what you do if you’re driving anything.”
This commentary originally appeared September 23 on Forbes.com
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