In part 3 of our 6-part series delving into our concept of a Health and Financial Security (HFS) portfolio, we take a look at the goal of protecting and maximizing income. (Read part 1 and part 2.)
For us at ConnectedHealth, helping people achieve better health and financial security means giving them context to make choices around products and strategies that help them meet four complementary goals – protecting and maximizing health, protecting and maximizing income, protecting assets, and saving for the future.
Protecting and maximizing income is really all about maintaining spending power. Most products and strategies in this category are designed to help replace income in the event of an unforeseen income loss or major expense, or to maximize income by taking advantage of tax savings or discounts.
For many, life insurance is the most critical product to hold in this category. If anyone depends on you for your income (spouse, children, aging parents, etc.), life insurance can provide much-needed cash for them in the unlikely event that you die. How much life insurance you have ideally depends on some assessment of your dependents’ future needs (e.g., living expenses and longer-term goals like tuition). Most people decide to hold life insurance, but there are a few situations where it may be less important to have it. If you have no dependents and your death would not leave loved ones scrambling to cover your final expenses and debts, you may not need life insurance, at least not a lot of it. And, if your financial position is such that you have significant other resources your dependents could use to support themselves in the event of your death, you may choose to forego life insurance, knowing that you are covered in other ways.
Disability insurance, particularly long-term disability insurance, is often overlooked, but very important for most wage-earners. Most people don’t realize that they are far more likely to become disabled – either temporarily or permanently –than they are to die prematurely. Disability insurance helps replace lost income due to an inability to work, and it deserves serious consideration as a part of most HFS portfolios.
Supplemental income products – e.g., accident, critical illness, cancer, or hospitalization insurance – are types of income replacement products that make sense for some. These policies typically provide a specified amount of cash that can be used to pay expenses such as deductibles, costs for care not covered by health insurance, or even household expenses, if you encounter the situation(s) covered by the plan. If you have children who are active in sports, for example, an accident plan might not be a bad idea. When considering these plans, it’s important to remember that you probably don’t need all of them at once. Unless you are extremely risk-averse, having all of them would likely result in you being over-insured, and there are probably better ways to put your money to work for you.
On the tax-advantaged savings or discount front are things like flexible spending accounts (FSAs) and employer-sponsored discount programs (e.g., for parking, transportation). These are simply ways to save money on costs and services you know you will likely use.
And let’s not lose sight of emergency cash savings. This is arguably one of the most critical foundation elements of any HFS portfolio. Experts recommend having 3-6 months of living expenses readily available to cover the unexpected. You don’t want to be forced into bad strategies like using credit cards with high interest rates or borrowing from your 401k plan (almost always a no no!) if you encounter large and unexpected expenses. While emergency cash isn’t a product you can purchase, it’s a strategy you can – and should – employ.
Next up…a deeper dive into protecting assets.