Protecting Your Health, Life, and Ability to Earn Income – The Foundation To Financial Freedom

On Monday I talked about protecting your personal property – your car, your home/condo/belongings (for renters), and your assets. Today I’m going to deep dive into protecting your health, life, and ability to earn income.

After knowing your net worth, getting to know your cash flow, discovering your dreams, and planning to pay off non-deductible debt (if you have any), you need to put the rest of your financial plan onto firm footing by protecting your assets. As I talked about in my emergency planning article, disasters can happen to anyone. Even through no fault of your own, your car can be damaged, your home caught on fire, someone sues you, a family member gets cancer, you become disabled, someone dies, or there’s a disaster at your business. You don’t want one of these disasters to become the reason that you don’t achieve financial freedom-or have it ripped away from you.

“But wait,” you may be thinking, “I’m already financially free. Can’t I self-insure?” The answer is – sometimes/it depends (sorry-I know that’s a very “lawyer” answer). I’ll talk about self-insurance as I go through each type of insurance you need to consider.

A few notes before we get started – I’m not a licensed insurance expert, just a hobbyist. If you want expert advice, please consult an expert. This is for informational purposes only. And none of these are affiliate links. I’m here to help you, not to make money off you.

• Car insurance – Includes motorcycles and any other vehicle you drive
• Home/Condo/Renters insurance – Covers your home, condo, or belongings/liability in a rental
• Umbrella insurance – important for high-net worth individuals- if you’re FI and don’t have this, look into it! (not applicable for everyone)
• Health insurance
• Disability insurance
• Life insurance – term only please
• Business insurance – Various types of insurance can protect different aspects of your business (not applicable for everyone)

More exciting insurance talk today!

Health Insurance

The Basics This would probably be more accurately refered to as “sickness insurance”, because it usually doesn’t pay anything to keep you healthy, but instead pays when you’re not. Doctors, hospitals, blood tests, X-rays, CAT scans, MRI’s, surgery, chemotherapy-essentially any medical treatment is covered here.

Should You Self-Insure? No. If you’re thinking of self-insuring – stop right now. Or if you’re thinking that you’re a healthy person so you don’t need this – knock it off. Health care costs can be in the hundreds of thousands or even millions of dollars. A NICU stay can be over a million easily. And a disease like cancer can strike at any age, no matter how healthy you think you are. You can live off nothing but vegatables, fruit, and air, running dozens of miles a day, and get hit by a car/thrown off your bike/get cancer with no family history/any one of a dozen other things. Even if you do everything right, don’t fool yourself into thinking that means you and your family will never get sick. DO NOT GO WITHOUT HEALTH INSURANCE.

Here are some examples from my own personal experience. I’m currently 36 years old – so on the younger end of the spectrum but old enough to know of multiple tragic situations.

• When I was a teenager I needed an emergency appendectomy. Age? 16. Can this be prevented by healthy living? No. Cost? Likely in the tens of thousands
• My husband was on a ventilator in the ICU for a week after going into septic shock following a surgery that went wrong. Age? 37. Can this be prevented by healthy living? No. Cost? Over two hundred thousand dollars after the insurance discounts. Likely five hundred thousand before discounts.
• One of my high school friends tragically got brain cancer and passed away two years ago, only a few months after the birth of his only daughter. Age? 34. Can this be prevented by healthy living? No. Cost? Likely over a million dollars.
• One of my friends from church got blood cancer and passed away last year – she was the single mother of two young children ages 15 and 5. Age? 40. Can this be prevented by healthy living? No. Cost? Again likely over a million dollars

I can’t stress this enough. I know some people like to live in a fantasy world, where living healthy and exercising will keep them and their family healthy forever. But stuff happens. It happens to real people. It can happen to you, to your spouse, or to your kids. No excuses here-get health insurance.

How Much To Carry Usually your choices here relate to how much of a deductible you want to take on – which is how much you’ll pay out of pocket before the insurance kicks in every year. You’ll want to look into an HSA  (Health Savings Account) if offered by your employer or if you’re shopping on one of the exchanges. It can be a powerful tool not only for medical expenses but also for future retirement savings-but it’s not appropriate for everyone. If you’re like me and have extensive medical expenses every year, or if you have children, you may not be able to “hack” the HSA like others.

How to Get the Best Price Two ways here, depending on if you’re shopping on the exchange or through your employer:

• On the exchange: Shop around. The differences in price are often due to the size of the dedutible and the network of doctors available to you. Simplified, smaller network = less costly, and higher dedutible = less costly. The more you can afford a higher upfront deductible, the less your monthly cost
• With your employer: Look at all the different plan options avaialable, if you have multiple. You might have an option to go with a health care FSA, which can be used to pay medical expenses, or a low-deductible plan with no HSA. Don’t dismiss these-if you tend to need medical care they can be worth the extra cost per month

Other Ways to Save Money

• Stay healthy. Yes, it’s true that staying healthy is no guarantee of not needing to use your insurance. But it can reduce the frequency of standard doctor visits, injuries, and other more common things. Think of your health insurance as being there for a catastrophe, not for smaller things.
• Check incentives.  If you get insurance through an employer, you might be able to get paid some incentives for doing certain activities. Sometimes getting an exam, not smoking, or meeting a goal will get you extra money. So be sure to read through what’s available and take advantage of it
• Hack your HSA – if appropriate. If you don’t have a lot of medical expenses (or you have a really high income), and your plan is HSA eligible, you’ll want to save and invest inside an HSA while paying medical costs out of pocket. That will allow your HSA contributions to be tax-deductible, grow tax-deferred, and be tax-free when withdrawn in the future for medical costs. It’s very powerful, but it’s not an option for everyone.

Disability Insurance

The Basics This kind of insurance protects in case you become disabled and unable to work. Many people will become disabled at some point in their working career – although the exact numbers are debatable, they’re still higher than the odds for life insurance. So you’ll want to make sure you protect your income. There are two primary kinds of disability insurance – short term (kicks in after you’re out of work for a short time and continues for 6, 9 ,or 12 months) and long term (kicks in after some months and continues for years). There’s also “own occupation” and “any occupation” coverage – “own occupation is more expensive because it pays if you’re unable to work in your own occupation, while “any occupation” is less expensive because they’ll expect you to return to work in any profession, even if it’s not your own

Should You Self-Insure? Maybe. If you’re financially independent you may not need disability coverage. But you should consider a few things:

• If you become disabled and unable to work, your spouse/partner will need to  pay for your care (sometimes significant care). They may be unable to work or need to hire a full-time caregiver, depending on the disability. This would deplete your assets
  • If you’re single you may need to hire full time care, and pay for all living expenses, while not working.
• If you earn a high income, like a doctor/lawyer/high paid professional type of income, you will want to insure against the future loss of income
• If you have debts, like student loans and mortgages, it might be a stretch to pay for those while you’re not bringing in an income

How Much To Carry Often you’ll get some coverage free through your employer. Look at that offer carefully and decide if the percent income they’re offering will work for your family. Between that and your emergency savings

How to Get the Best Price If it’s offered through your employer, get that. The rates are often better than what you’ll get on your own

Other Ways to Save Money Do what you can to minimize needing to use the insurance – don’t take on too much risk and do things that will lead to disability.

Life Insurance

The Basics: This insures against the untimely passing of yourself or your spouse/partner. This should not be insuring children-you don’t depend on their income. Also if you don’t have dependents (such as children or a disabled spouse) or significant debts that someone else has co-signed (student loans) you don’t need this kind of insurance.

Should You Self-Insure? Maybe. You’ll want to look at several aspects before determining if self-insurance is right for you:

• How much in assets do you have – is it enough to pay for living expenses for your family for years?
• How many expenses do you really need to cover – if you’re saving a large portion of your income for something like retirement, you don’t need to replace that
• How many liabilities do you have outstanding – is there something like a mortgage or a large amount of student loans that you would want gone in the case of someone passing?
• Social security death benefit – Often not mentioned in insurance analysis, there’s a death benefit that your spouse and dependents will receive if you pass away. Check out how much you’ll get monthly-you may be surprised at just how much it is. It may be enough to cover your income needs
• Large future expenses – college, weddings, and other large future expenses that you want covered in case of your passing. Do you have enough to fund these?
• Employer insurance – are you provided some life insurance free of charge through an employer? This would reduce (or possibly eliminate) your need

How Much To Carry If you need insurance, the rule of thumb that’s often thrown out is 10 times income plus debts and large future expenses. This might be too much though, once you factor in the above. So try this instead:

• Take your monthly expenses
• Subtract social security death benefits
• Multiply by 12 to get your annual expenses
• Multiply by the number of years you want to cover-10 years is probably good
• Add in any large future expenses
• Subtract your assets you would want to cover this
• Subtract employer insurance
• End with how much insurance you’ll need – round up a bit to cover unknowns

Looks confusing? Here’s an example:

John is paid $5,000 per month. His wife Judy is a stay at home mom of their two children – Jack and Jennifer. John and Judy have a mortgage of $200,000 on their home but no other debt. They save 20% of their income toward retirement. They want to pay for college for their two children – about $200,000 total . So how much insurance do they need?

Using the “rule of thumb”, John should carry about $1 million ($600,000 to replace income, $200,000 to pay that mortgage, and $200,000 to pay for college).

But wait! They really only need to replace $4,000 in income-remember, they’re saving $1000 every month toward retirement. 

Lets say John looks up his Social Security statement online and determines his survivors would get $2,000 per month in death benefits until they turn 18. So monthly he needs to replace $2,000.

And John’s employer provides a year of income, or $60,000, in free life insurance.

If John were to pass away, the family income would go way down, making them eligible for college aid. So college costs might be reduced to only $50k for his two children.

So John really needs to replace about $430,000. Round up and call it $500,000 – or half the “rule of thumb.”

How to Get the Best Price It’s simple – buy term insurance. Don’t listen to insurance salespeople who want to sell you whole life, or life insurance on children, or insurance for you if you don’t have dependents, or anything other than term insurance for someone with dependents.

Also be sure to really run the numbers so you’re not overinsuring or underinsuring. Overinsuring is just unnecessary-you’re trying to provide stability and security for your family in the event of your passing, not give them enough to go sailing on a yacht they name in your honor. And underinsuring can be devastating to your family. Just when they’re reeling from your passing, they also need to worry about money.

Shop around, use AM best to make sure you’re with a solid insurance company once you’ve found some good price options, don’t let insurance salespeople talk you into bad options – if you follow those tips you’ll secure an inexpensive but solid protection against your untimely passing.

Other Ways to Save Money

• Don’t smoke – smokers pay extra. If you smoke and then quit, be sure to shop around again for insurance after some time. You might be able to cut the price.
• Get to a healthy weight – If you’re overweight you may pay more for being a slightly higher risk. Again, if you’re overweight and then lose weight, it may be worth shopping around to see if you can get a better price
• Buy young for a longer term – The younger you are, the better your price. Not only are you less likely to be found unhealthy, but since your chances of making a claim (dying) are so small the insurance is inexpensive.

Conclusion

Now you’ve protected your cars, home/condo/belongings, assets, health, income, and against your untimely passing. On Friday I’ll give a primer on kinds of business insurance you may want to consider if you own rental property, run a blog, or have another small business. Have any insurance questions or a story to share? Let me know in the comments.

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