If you were asked, “Which is more valuable, the golden eggs or the goose that lays them?” What would your answer be? Common sense would tell you the goose of course! And why is that? Because the goose will provide a continuing supply of golden eggs for as long as it lives. The same could be said of you. Think about it. Each of us provides a financial benefit to someone. That someone could be a spouse, child, family member, company or friend.
Whether you are a business owner or an employee, you possess economic value. And you spouses (who work harder than your husbands but who are not employed outside the home), don’t discount your economic value. To pay someone to do all the things you do would be a great expense. That is why each of you is a golden goose.
Just as you would protect the golden goose, protecting yourself is paramount to having financial peace of mind. Risk management deals with potential financial losses and transferring those losses to a third party. It focuses on how long it would take you and your dependents to recover from the loss in days, months, years or never. A well-rounded protection plan should cover the full range of risks, including property and casualty, health, premature death and disability.
When it comes to risk management and protection planning, the first things that come to most people’s minds are car insurance and homeowners or renters insurance. Having your possessions insured for loss is a wise thing to do. Sometimes my clients ask me what “things” they should insure. My general rule of thumb is you should insure anything that will cost you more to replace than the balance in your emergency fund.
But even more important than insuring your “stuff,” risk management is also about insuring “YOU.” Consider for a moment what would happen if you lost the ability to earn money because of death, illness or injury. The result could be a financial crisis. Ask yourself this question: If you lost 100 percent of your income, how would that affect you and your family’s lifestyle? What about 50 percent? If you’re like most people, either situation would have a profound impact on your family’s financial situation.
That’s why it is important to protect the golden goose. Consider these facts:
- While about six in 10 Americans say they own life insurance, nearly half of them may not have as much coverage as they need to address the financial needs of their family if they were no longer contributing to the household, according to the latest Bankrate Money Pulse survey.
- Especially vulnerable are families with children under age 18. More than one-third of these parents (37 percent) have no life insurance at all, while a third of those who do have no more than $100,000 in coverage (32 percent).
- More than half of U.S. workers have no disability coverage, and that percentage is dropping, an insurance company survey shows.
- 92 percent of Americans would need to make lifestyle changes if they lost part of their family income for three to six months.
- Only 25 percent of workers completely understand disability insurance. These figures should be concerning because they indicate that most people are not prepared as well as they should be if they die prematurely or become disabled.
What Should You Do?
Start by evaluating how you are managing risk in your present situation. You need answers to these questions: Do you have enough insurance to cover your medical expenses like doctor’s visits, surgeries and hospital stays? What happens if you die prematurely or can no longer work due to an illness or injury? How will the people who are financially dependent on you get along if you are no longer around to provide financial support? Will they be able to stay in the same home? Will they have to change schools? Will they have to sell assets to maintain their present lifestyle? Will their dreams and goals still be obtained without your financial help?
The best way to protect you and your loved ones from a premature death or disability is through life insurance and long-term disability insurance. When it comes to life insurance, there are two kinds: temporary (Term insurance) and permanent (Whole life, Universal life, Variable life). Which type is best for you depends on your specific situation, and it’s possible you could need a combination of both. There are many variations available for long-term disability insurance, too. Once again, the ones that are best for you depends on your personal situation. A good resource to learn more about life and disability insurance is www.NAIC.org. NAIC stands for the National Association of Insurance Commissioners. Click on the Consumer Resources tab.
What About My Stuff?
When it comes to insuring your material possessions, do you have adequate coverage amounts for your home, car and other possessions? Do you have the proper types of property insurance in place? Are your deductibles set at the appropriate limits for your situation? Health care coverage is also a vital component in a risk management strategy, so health care insurance is a necessity. For more information about property and casualty, and health care insurance, www.naic.org is a good resource.
Understanding your needs and your options can be difficult without help from a trusted, experienced advisor who can help you understand and manage your risks. Regardless of whether to try to understand your needs and options on your own or with an advisor, it’s important for you to take action on this very important aspect of your financial well-being.
Ramiro Marmolejo is a Certified Financial Planner (CFP) and Chartered Financial Consultant. He has been in the financial services industry for 20 years serving individuals and business owners.For more information about Marmolejo, visit www.wealthwatchadvisors.com or call 210-249-5360.