Do You Have These Essential Financial Protections in Place?
December 20, 2012One of the most difficult financial challenges people often face is trying to decide how to balance competing goals. A typical situation might be someone who wants to pay off student loans and credit card debt, save for emergencies and a home purchase, start putting something away for retirement, open a college account for their newborn, and purchase disability and life insurance. Yet, they only have a limited amount of money they can save each month.
Today, we’ll start by looking at risk management. After all, many financial goals are long term but you and your family might need insurance or emergency savings today. Since this could be a catastrophic situation (think death or disability), it’s hard to think of another way for those dollars to have as much of an impact when you really need them. The problem is that no one like to think about these things so we tend to go into denial. But if you wait and your health deteriorates, you run the risk of much higher insurance premiums in the future or even becoming completely uninsurable.
Health Insurance. This is a good place to start since everyone needs it and will be required to have it under the new Affordable Care Act. Medical bills are also one of the most common debts we see and the leading cause of bankruptcy. At the very least, you’ll want to have a high-deductible catastrophic policy. These tend to be less expensive and can enable you to make tax-free contributions to a health savings account.
Long Term Disability Insurance. This is often overlooked even though the chances of you becoming disabled is much greater than dying before you retire and the financial impact is higher. If you work in a highly compensated field, you might also want to get an own-occupation policy in which the insurance will still pay you if you’re able to get another job in a different occupation. To save money, see if you can purchase it cheaper through work and if you buy an individual policy, consider choosing a ‘social insurance offset” in which the payments are reduced by any government benefits you get. Those government benefits are too hard to qualify for to rely on completely but you can use them to reduce your premiums. Finally, in determining how much you need, keep in mind that the benefits are only taxable if your employer is paying the premium.
Life Insurance. The first question should be whether you need it at all. If you don’t have dependents, the answer is probably not. If you do, don’t forget to factor in your family’s Social Security survivor benefits when calculating how much you need. Unless you have a permanent need for life insurance (like you need it to pay estate taxes), low cost term insurance usually makes more sense than a much more expensive permanent policy. Term4Sale is a good place to get quotes since they do not sell insurance and thus includes no and low load insurance policies.
Property and Casualty Insurance. Most of us have auto and homeowner’s insurance because they’re required but there are a few gaps in many people’s coverage. One is a lack of renter’s insurance for renters. This is especially important if you have any valuables that would be hard to replace. Another is inadequate homeowner’s insurance for people who bought their policy with their home 30 years ago and haven’t updated it to keep pace with the rising cost of replacing a home. Finally if your net worth exceeds the limits of your existing liability insurance, you might want to get an umbrella policy to provide excess liability insurance.
Emergency Savings. In addition to being adequately insured, you should have some savings set aside for those emergencies that aren’t covered by insurance and to pay for the deductibles and co-payments for those that are. Financial planners generally recommend having at least 3-6 months worth of necessary expenses an emergency fund but you may want to cover as much as 6-9 or even 9-12 months if your income is unstable (self-employed or in a company or industry with lots of layoffs). On good place to start is a Roth IRA. The money is easily accessible since you can withdraw the contributions at any time without taxes or penalties but anything you don’t withdraw can grow to be tax-free after age 59 1/2 so you’re saving for retirement at the same time. Just be sure to keep the Roth IRA invested somewhere safe like a savings account or money market fund until you’ve accumulated enough savings outside the Roth IRA.
Basic Estate Planning. Finally, you’ll want to have some basic legal documents in place. Make sure you have up-to-date beneficiaries listed on your life insurance policies and retirement accounts. Depending on your state, you may also be able to add beneficiaries to your bank and investment accounts and even your home and car to avoid probate. Other important documents include a will, advance health care directive, and durable power of attorney. A trust is also recommended if you own real estate or other significant assets. You can find low cost or even free templates of each of the basic forms online but you may at least want to have an estate planning attorney review them to make sure you’re not missing anything. You can find an estate planning attorney through your local bar association’s lawyer referral service.
Insurance, emergency savings, and estate planning are some of the easiest things in the world to procrastinate. But keep in mind that you never know when you’ll need these protections in place and there’s no “good time” to get them done so do it now. They may not exactly be the most exciting aspects of financial planning, but if and when you need them, the last thing you’ll want is more excitement.