Audio Version: Let Me Hear It!
Running fashionably late into the month of May, our #FashionSense nod to Financial Literacy Month is almost complete! Now that you have the basic money essentials – a solid base layer (budget), a piece for the what-if’s (emergency fund) and support for where you’re going (savings plan) – there are just a couple of items left to complete your financial collection. Since no one likes to get caught in the rain, it’s wise to work a blazer option into every outfit. Consider insurance to be your financial blazer; it travels light and you’ll be glad to have the protection if you need it. Insurance can protect you from the loss of income and the assets you have to show for such hard-earned income. Your financial closet just isn’t in order if you don’t have these types of protection:
Life Insurance: If you have loved ones that depend on your income, we recommend having enough life insurance so that the investment growth alone could replace your income, leaving the principal available for large or unexpected costs. Additional coverage may also be purchased to pay off existing debts or to fund other large future outflows such as college. Over time, your insurance need is likely to decrease as your debts are paid down and future earning years become less. Fortunately, term insurance, commonly used to cover your income replacement needs, is very affordable.
Long-Term Disability Insurance: Disability insurance generally replaces between 50-70% of income should you become unable to work due to sickness or injury. While most people understand the need to replace income if they die, they often forget to replace that income for themselves or loved ones if they become disabled. This is a critical mistake because we are at greater risk of becoming disabled than of dying! Group disability is often available through employment, with most plans providing a percentage of income, up to a maximum dollar amount. Be sure to know what the maximum benefit is so you can determine if it is sufficient for your needs. A supplemental individual policy should be purchased to cover any estimated shortfall. Note that long-term disability also provides for additional leave that may be needed due to pregnancy.
Umbrella Liability: Liability insurance protects existing assets and future income from the risk of liabilities imposed by lawsuits or other similar claims. Underinsuring for a potential liability is one of the most common money missteps. An umbrella policy adds an extra layer of protection when claims exceed the limits provided under traditional auto and home policies (typically between $100-$300k). The common rule of thumb is to obtain an umbrella policy equal to the amount of your net worth, which is surprisingly inexpensive.
Now, take a step back, look in the mirror and prepare yourself to take one final step toward financial completeness. Next week, accessories! Decisions, decisions, decisions…
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