So every few years, you need to review your plan.
As you’re reviewing, assess how much reality differed from your assumptions. Sometimes, you’ll be pleasantly surprised. Your portfolio may earn more than you expected, or you may spend less than you estimated.
Other times the review won’t be as pleasant. The markets may have dragged down your portfolio returns. Or your spending may have exceeded your estimates. In either case, you aren’t reaching your goals.
Even if you do meet the mark in most instances, you still are never really done planning and revising. You’re bound to experience changes in your life, the economy, the markets, tax law, and other areas. You may come across new opportunities that weren’t available a few years ago or that weren’t right for you then but make sense now. You need to continually adapt your plan to these changes. You may need to adjust your spending or change your investment portfolio.
Chapter 2
Protecting Your Employment Income and Your Health
In This Chapter
During your working years, especially your earlier working years, your future income earning ability is probably your most valuable asset. Consider that the typical person in his 20s and 30s has many years (decades, in fact) ahead of him to earn money to feed and clothe himself and make other expenditures (for example, transportation, taxes, medical bills, and vacations) and save for the future. Unless you’re independently wealthy (or have a deep-pocketed relative ready to provide long-term care for you if you hit hard times), you should carry the proper types and amounts of insurance to protect yourself and your family if something occurs to you that would affect your ability to earn a living. In this chapter, our focus is on protecting income you’re earning while employed.
Insurance isn’t free, of course. And, like other companies, insurance companies are in business to turn a profit. So you want to make sure you obtain proper insurance protection at a competitive price and buy only the coverage you need.
In this chapter, we dive into the details regarding life and disability insurance you may need. Here we also discuss your employment income and how best to protect it. Finally we also cover the importance of making the most of your health to minimize the chances of future insurance claims. If your health isn’t good as you enter retirement, you’re going to have more issues to face than just those dealing with your personal finances. So getting your health in order is important.
Needing insurance is kind of like needing a parachute: If you don’t have it the first time you need it, chances are you won’t need it again. Regarding your need for life insurance, of course, you don’t get second chances. (Unless you’re considering near-death experiences; and the life insurer doesn’t pay out for those!) So if you “need” life insurance, you should get it as soon as possible.
The following sections explain what life insurance can do for you. They also help you determine whether you need insurance, and if you do, how much you should consider buying.
Understanding the purpose of life insurance
The primary reason to consider buying life insurance is to provide financially for those who are dependent on your employment income. However, just because you have a job, earn employment income, and have dependents (children, a spouse, and so on) doesn’t mean that you need life insurance.
So how do you know whether you need life insurance coverage? Your current financial situation is an important factor in determining your need. If you haven’t already assessed your retirement plan and tallied your assets and liabilities, be sure to read Chapter 3.
On the other hand, you may find that even though you’re still working, you’ve achieved financial independence. In other words, you’ve accumulated enough assets to be able to actually retire and no longer need to earn employment income.
For example, consider one extreme: Microsoft founder Bill Gates has dependents and he doesn’t need life insurance to protect his current income. That’s because he has billions in investments and other assets to provide for his dependents. Of course, the rest of us aren’t Bill Gates! But we bring up this enormously successful entrepreneur in this discussion to drive home the crucial point that if you’ve accumulated significant enough assets compared to your annual living expenses, you may not need life insurance.
Determining your life insurance need
Each person’s circumstances vary tremendously, so in this section we don’t tell you specifically how much life insurance to get. Instead, we show you the factors you need to look at in order to determine that amount. We’re not fans of general rules like getting ten times your annual income in coverage, especially for those approaching or already in their senior years. The reason? Each person’s circumstances can vary tremendously among many factors such as
✓ Your assets: Generally speaking, the more you have relative to your income and obligations, the less life insurance you need.
✓ Your debts: Of course, not all debts are created equal. Debts on real estate or small businesses tend to have lower interest rates, and the interest is often tax-deductible. But the more of this type of debt you have, the more life insurance you may need. On the other hand, consumer debt – such as credit card and auto loan debt – tends to be at higher interest rates, and the interest generally isn’t tax-deductible. But again, the more of this debt you have, the more life insurance you’re likely to need.
✓ Your health and the health of your family members: If you have major medical problems or have a family member who’s ill or who has special needs, you may need more coverage.
✓ The number of children you need to put through college: A four-year college education, especially at private schools, is a major expense. So, if you have kids to put through school – and they may attend costly schools – you could be talking some really big bucks. And you face even bigger bucks if you want to help them through graduate or professional school after college.
✓ Whether you’ll have
