Just like that SPF15 you dab on before the beach, your insurance probably isn’t giving you enough coverage. So, I want to share some thoughts on how to know if you have enough.
I know, the last post was on the gender gap, this post is insurance – why do I have to be such a downer? Well, because there’s never a great time for downers AND as I learn more about personal finance, I realize more and more it’s about automating your life. If you spend time creating a plan for an emergency, if one happens (and most of us will have an emergency at one point) you won’t have to think too hard about your money in the midst of a crisis. Could you and your family pay for your medical bills, living expenses, etc. if you couldn’t work for a year or more?
I’m going to focus today on making sure you have ENOUGH life and disability insurance and that you know about umbrella insurance.
Life insurance: Do you have people that depend on your income? Student loans? A home? You should have enough life insurance to pay off your debts (including a mortgage), provide some money for your dependents, discharge any medical expenses from an illness or accident, and cover a funeral (it can be $20-$30K!). Experts say a quick rule of thumb is to have 10 times your income in life insurance. However, if you don’t have kids and you don’t own a home, that is probably aggressive. My job includes free life insurance (the pay out would be my current salary). That is enough to pay off my remaining student loans, cover a funeral, and the rest of my lease with some left over, so I don’t need extra insurance, but maybe you do.
New homeowner? Do you have enough life insurance to pay off your mortgage or to cover your lost income for 10 years? If you bought a home assuming a two-income household, would your partner be able to pay the mortgage, property tax, and maintenance alone? If not, you should have enough life insurance to cover home expenses, day care, and time off work to cope.
New parent? Some experts recommend upping your life insurance to 10X your annual income + $100K of college expenses per kid. How much cushion do you need for your partner or family to cover child care and living expenses without your income and time?
Whole life insurance versus term? No idea what the difference is between the two? Term insurance is what is generally offered through your employer (as mentioned, mine pays for this for free at 1X my annual salary). It’s generally pretty cheap (could be $3-$10 / month), but you only get a pay out if you die. In contrast, whole life insurance often has much higher premiums ($90 / month+) but the policy has usable value even if the insured is still alive. By the time you’re 30 (especially if you have kids), someone has probably given you a pitch for whole life insurance. My take: don’t do it. Dave Ramsey gives an example where you could pay $7 / month for $125K of term insurance or $93 / month for $125K of whole life insurance. That extra monthly investment would go much further in an index fund. The reason you have probably gotten a whole life insurance pitch is that they pay lucrative commissions to folks that sell them (a big warning that something is a VERY high margin product). The only upside is that they’re forcing you to save for the future.
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Open enrollment: you can generally only change your term insurance through work during open enrollment so get smart on your policy before then. When is open enrollment at your job?
Here are a few other things to look at for:
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Do you have short-term and long-term disability insurance? What would happen if you got into an accident and couldn’t work for a few months? What if it was longer than a few months? Same rules as above – if you’re single and don’t own a home, you will need less insurance than someone who is married, with kids, and a mortgage, but no matter what your situation, it’s important to have a plan if you can’t work for months or years. I pay $17 / month for long-term disability at work. It will cover 60% of my income up to $10K / month for up to 5 years. Life Happens has a good tool to help you estimate if this coverage would be enough for you.
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Thinking about getting pregnant? Think about signing up for short-term disability. Any illness or condition (including pregnancy!) that prevents you for working makes you eligible for short-term disability. However, you have to sign up BEFORE you’re pregnant in most instances or it’s a pre-existing condition. At my company, the short-term disability is only available during open enrollment so do your research in ADVANCE ladies. Some states – notably California, New Jersey, New York, and DC – have state insurance programs that will supplement your short-term disability.
Umbrella policy: Umbrella policies provide coverage beyond your regular insurance. If someone slips on the ice on your sidewalk, gets asthma from a property you rent them, or gets hit by your car, you could be liable beyond what your home or auto insurance covers (e.g., if your auto insurance maxes out at $300K and there are $500K in damages from an accident). If you have assets to protect ($1M threshold is a good rule of thumb) or lead a risky life (you have a dog, you’re a landlord, you like high impact sports like skiing or hunting), than it may be a good idea to have umbrella insurance.
If you have an hour (maybe while you’re traveling to <insert beach or lake location>), fill out the below table for yourself. I was able to do this with my pay stub + my company’s open enrollment PDF. Especially if you have any of these NOT through work, this record could be a big help to your partner or your family. Just make sure they know where to find this. I listened to a terrifying podcast about a woman whose husband died suddenly, and she didn’t even know the password to his IPHONE.
Assuming you don’t have an extra hour for financial planning during a typical week, sign up for a pHERsonal finance day. You will have dedicated work time with access to experts who can guide you through the tough decisions, like your insurance choices, if you get stuck. Whether you join us or not, what’s your emergency plan??
Eryn