Over the course of the past 18 months, the pandemic has led to a shift in the mindsets for so many. People are seeing their lives through a new lens — many of us are finding ourselves wanting to seize the day, take on bigger risks, or finally go on the vacation we’ve been longing for. We’re also finding ourselves wanting to be more prepared for the unknown by taking care of highly important but, until now, “when I get around to it” tasks we’ve kept on the back burner for “sometime”; for example, creating a will, reviewing our insurances or making sure we’ve invested properly for our goals.
The most important realization COVID-19 has brought to light: we’re not as invincible as we think. And that’s why it’s important to take the proper steps to try and protect yourself financially and build a solid foundation for your financial future. That being said, thinking ahead might mean facing some hard realities. How do you plan to take care of yourself and your family if tragedy were to strike? Will you or your loved ones be left with support they need if something catastrophic were to happen?
When it comes to financial planning, it’s important to strive to protect ourselves and our families for what could go wrong, while simultaneously planning and investing for what could go right. Here are five ways you can mitigate the risk against yourself, and your family, in the case of unexpected events.
What Could Go Wrong?
If you’re keen on embracing the seize-the-day mentality, it might be difficult to take a step back and think about everything that could go wrong. Although you shouldn’t be living in fear of all the negative twists and turns life can take, it’s important to be realistic and have a plan in case a worst scenario were to arise.
Especially in the financial world, we strongly encourage you to be prepared for what life may throw your way. A few things to consider:
- You could lose your job and spend an unknown period of time unemployed
- A worst-case-scenario: you could come down with a catastrophic, career-ending illness or injury.
- You could pass away unexpectedly and leave your spouse and children with a single income, large debts, and high living expenses (originally meant to be supported by two incomes).
- You could inadvertently neglect your beneficiary designations or estate plan and leave your survivors with years of probate, or legal red tape and fees, while assets remain locked up.
Worse yet, some of these things may even happen together. It’s not always easy to think about your life in this way, but here’s the key takeaway: you have a plan in place for when things go wrong — the emotional toll will be hard enough. And if we’ve learned anything from the pandemic, it’s that life is short – and being prepared to face things head-on can help.
5 Ways to Seek Protection of Yourself Financially
How exactly can you prepare for financial curveballs that might come your way? Seeking ways to help protect yourself can seem overwhelming, but it’s an important stepping stone to securing your future.
An Emergency Fund
An emergency fund is one of the most effective ways to plan for an unforeseen emergency. Without an emergency fund in place, people will instead lean on credit cards or even borrow from family members to cover emergency expenses. That’s why a separate emergency savings fund is so crucial: it gives you something to fall back on when something unexpected happens.
What does a good emergency fund need? You need no less than three months of savings; at Arsenal Financial, we encourage six to nine months of savings or more, depending on your income and your circumstances. The answer to ‘how much?’ is highly personalized and really comes down to whatever helps you sleep better at night. This money should be safe, at the bank and available at a moments notice.
Disability Insurance
Disability insurance is often overlooked as part of an employer-sponsored plan benefit that “comes with the package.” Most of the time these benefits come without options that can be selected during ‘open enrollment’ so are often skipped over. Disability insurance can be a great way to mitigate risk if anything unexpected happens, and this type of coverage replaces a part of your monthly income if you are injured or ill.
Don’t think you need disability insurance? Many people can’t imagine having something happen to them and stopping them from earning income. But statistics from the Health Insurance Association of America show that there’s a 30% chance workers will encounter some sort of disability throughout their career, and it will impact them for at least three months. That’s a long time to go without a steady income! In some worst-case-scenarios, workers may suffer career-ending injuries or illnesses.
If you’re self-employed or a small business owner without a group disability policy through work, consider purchasing a policy in the private market as a means of seeking protection for yourself and your family.
Life Insurance
When we talk with clients about life insurance, they often believe they’re protected because “I have life insurance through work.”
Here’s the reality: those life insurance plans have limitations that need to be carefully considered, especially when it comes to taking care of your family and loved ones. Forbid that something were to happen to you, life insurance can provide peace of mind for loved ones.
For example, a man in his early 40s gets let go from his job. His company life insurance would likely end with his employment and now he may be facing health challenges that may not have been a factor 5 or 10 years ago making it much harder or more expensive to secure a private policy. Life insurance can provide security for your family, so they don’t have to move, uproot their life, or start a GoFundMe page if anything happens to you.
Long-Term Care (LTC) Insurance
For younger clients it’s often hard to think of the end of a working career but for those who are on the back half of their careers and have felt some of the impacts of aging on both mind and body, they realize they might need some extra help taking care of themselves or their loved ones.
Long-term care (LTC) insurance is one way to prepare for what might happen later in life, both physically and cognitively, and it covers a multitude of services that aren’t covered by regular health insurance, like routine daily activities such as bathing, dressing, and more. This type of insurance policy will also help cover costs of care involved with chronic medical conditions, disabilities, and disorders. In most cases, you will be reimbursed for care in several types of situations, including:
- Home-based care, such as caregivers
- A nursing home
- Assisted living facilities
- Adult day care center
As mentioned, it may seem far in the future, but long-term care costs are an important part of any financial plan, especially if you are later in life. It can be costly, or difficult, to buy coverage when you need it – so it’s crucial to plan ahead! If you already have a debilitating condition, for example, you won’t qualify for LTC.
Some people self-insure, but the price tag can be pretty steep!
How much will it all cost? Well, costs will depend on a variety of factors, including your marital status, your age, your health, and your gender, to name a few.
Take this case study: a single, 55-year-old man buying a new policy might pay around $1,800 a year for a long-term care policy with a pool of benefits of $164,000, according to the 2020 price index from the American Association for Long-Term Care Insurance. A single woman of the same age might pay around $2,600 a year for that same policy.
Estate Planning
Many people devote large amounts of time when buying a house, choosing which car to buy or stocks to invest in (and rightly so), but then spend little to no time deciding who will inherit their assets after they’re gone. Estate planning is incredibly important because without a plan in place, settling your affairs and dividing up your assets once you’re no longer around can have a long-lasting impact on your loved ones.
Estate Planning isn’t only for the rich, either. Even if you don’t have a pricey home, large retirement account or valuable possessions to pass down, an estate plan can help your heirs avoid timely and costly consequences. Also, you don’t have to be rich to do well in the stock market or real estate market — both of which can produce valuable returns to pass on to your heirs.
In fact, the main component of estate planning is designating heirs for your assets in a will. Without an estate plan, the decision over who gets your summer house or stock portfolio will be left to the court once you pass away. This can be a long, expensive and even ugly process, causing wars between family members and pitting people against each other. An estate plan may also reduce the tax burden that comes with your estate.
Having an estate plan also helps protect young children in the event both parents pass away before the kids turn 18. A will names the guardians who will raise your children — a decision you surely wouldn’t want to leave up to the court system.
However, estate planning goes far beyond a will. Here are some other aspects of estate planning:
- Durable Powers of Attorney: appoints an individual to make medical and/or financial decisions on your behalf if you are unable to do so.
- Medical Directives: outlines the medical treatments you do or do not want in the case you become incapacitated.
- Beneficiary Designations: Explains who should receive money from your life insurance policies, annuities, retirement accounts, and more.
- Trusts: Facilitates the passing of property onto your heirs, and potentially provides tax benefits for your beneficiaries.
The sooner you get started with estate planning, the better. The best plan of action is to talk with an Estate Attorney and be sure to update your plan regularly, especially after major life changes such as marriage, divorce or death in the family, and changes in tax laws.
Why Does This All Matter?
Building a solid financial plan – and planning for all of life’s uncertainties – can seem daunting at first. Preparing for these moments can bring up a lot of emotions, and it involves thinking a lot further down the road than most people normally do. But that’s why it is so important to take action now. You can sleep well knowing you and your family are doing what you can to be prepared.
Disclaimer: The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Guarantees are based on the claims-paying ability of the issuing company. Please keep in mind that insurance companies alone determine insurability and some people may be deemed uninsurable because of health reasons, occupation, and lifestyle choices. This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.
