Insuring Your Financial Future
There’s a happy balance between paranoia and recklessness. Similarly, there’s a reasonable balance between being over or under-insured.
In a market inundated with insurance for almost anything, all available in a vast array of formats, it can be difficult to know what products to choose and how much coverage you actually require. Whether it’s insurance to protect your property, income, health, or life, even the most reasonable policies can add up to a dramatically high monthly cost.
If fact, the average American currently pays about 12% of their total annual income solely on insurance costs, and while it’s nice to have peace of mind knowing you are protected, given that it’s impossible to protect against every scenario, it begs the question of just how protected are you?
So what is the right amount of insurance to carry in order to avoid unnecessary exposure to your financial stability, without paying an arm and a leg? After all, insurance companies are in the very business of playing the odds by offering a service the majority won’t ever require.
Unfortunately there’s no magic formula here. I would love to say don’t spend a penny more than 6% of your total income on insurance, and support that figure with a fact-checked rationale, but I’m sure you can guess what the real answer is.
It depends on the totality of your financial and life situation. Your income, your lifestyle costs, your age, dependents, family history, your state of health, where you live. The list goes on and on, but suffice to say that the appropriate amount of extended health insurance for someone living in Canada, with access to free healthcare, is going to look a whole lot different than an American with an identical income and health history. And the requirement for life insurance is going to be very different for someone leaving behind large debt loads and multiple dependents, versus someone who has eliminated all their debt and created passive income streams to support their family even in their absence.
All of your lifestyle, financial factors, and more, play a role in determining the right level of insurance to purchase, and in order for anyone to truly provide an accurate and in depth answer to this question, they would have to know the in’s and out’s of your individual situation. But there are approaches to identifying your insurance needs that apply to nearly everyone.
One of the biggest criticisms of extreme early retirement, and the Financial Independence movement as a whole, is the inability to accurately assess your future lifestyle needs due to the length of time you are attempting to forecast. This concern is particularly applicable to anticipating your future costs of insurance. When you are in your mid-thirties, it’s pretty difficult to predict what your health may look like in your 60’s, 70’s or 80’s, and the associated extent of insurance you will require.
Will you end up requiring ongoing assisted living, finding yourself underinsured and relying on your savings more than planned, depleting your asset’s at an unsustainable pace? Or will you end up living in your own home well into your 90’s, passing peacefully in your sleep, having spent an arm and a leg on long term care policies and sacrificing lifestyle in favour of protection that you never even came close to needing?
It’s impossible to predict all that life may throw your way, but I certainly found that the closer Mike and I got to obtaining Financial Freedom, the more I thought about what types of scenarios could shatter what were building.
When I broke down my concerns, there were three primary issues that could be particularly difficult to weather solely on our incomes and savings, and would very likely result in us having to make some major changes in our financial and life plans.
1 – Divorce;
2 – A major health issue for either of us, or our children, for which the most advanced treatments are not covered under our current Canadian healthcare; and
3 – A catastrophic natural disaster.
Regardless of the scenario’s I ran in my head, those were the big three. The ones that could completely alter our course, send us back to the drawing board, and very possibly back into the job market.
A downturn in the stock market, a slowing of the real estate market, a mis-step in an investment along the way, those were not my major concerns. Those are easily enough protected against and planned for.
But the big three were major life changers, and of the three, two of them were area’s that Mike and I had/have limited control over. So how exactly to plan for and hedge against those things, without becoming paranoid or over-insured?
1 – Divorce
In the last decade a number of forms of divorce insurance have been introduced into the insurance market. Unfortunately, due to the high occurrence of divorce, the rates for most policies are rather costly, generally cover only legal bills, and don’t account for the impact of your assets being cut in half, or more.
No matter how you slice it, divorce can dramatically change whatever financial or life plans you have made, but fortunately insurance isn’t your only option to protect against a relationship breakdown. Open communication, accountability, transparency, maintaining alignment of goals, all contribute to building and sustaining a strong relationship.
So maybe the real divorce insurance is continuously investing in your relationship. Taking time for each other, listening to each other, and not allowing the world to come between you. Because it can happen – very quickly. Life is busy, and even the most solid relationships can end up in the backseat, neglected.
Keeping your relationship a priority, at the forefront of your life takes time, effort, and sometimes money. But it’s a much lower cost than the alternative, and it’s a whole lot cheaper and more effective than divorce insurance.
2 – Health Issues
There is pretty wide range of health insurance out there, the majority of which none of us will never need. But if we did happen to be one of the unlucky few – life altering doesn’t really begin to describe it.
Arguably one of the most stressful of life circumstances is going through a major health crisis, particularly that of a child, while simultaneously struggling to manage the financial implications of the required care. While we all want to do our best to protect against this, you could spend thousands of dollars per month on a wide range of insurance products and still not be able to cover yourself or your family against all feasible scenario’s.
The best bet is to acquire a reasonable level of insurance comparative to your income. You don’t want your insurance costs robbing you of the opportunity to enjoy your life, but you should guard against the most probable of events. In order to truly decide what level of health insurance to acquire, you need to assess your own health history, that of your dependents, as well as the health care options and costs in your respective area.
But there’s also a lot we can do in our day to day lives that doesn’t cost us a penny that will improve our chances of ever needing to rely on our health insurance. Maintaining a healthy diet, staying active, exercising regularly, and challenging our minds daily. While never a guarantee of perfect health, all of those things can be done at little to no additional cost, and can certainly stand to make a big impact on your future healthcare needs.
We also talked about not being stupid in the 12 Rules of Financial Freedom. This is an area where that rule can come in very handy. If you do stupid things in life, your odds of requiring expensive health treatments skyrocket. So be smart, you are your biggest asset, protect yourself.
3 – Natural Disasters
There’s only so much you can do to protect yourself against these types of things. The reality is – if they are going to happen, they are going to happen.
Mike and I chose to live in an area we love, but where a massive earthquake has supposedly been overdue for about 50 years now. It may come in our lifetime – it may not. If it does, and our house is destroyed, it could certainly have significant impact on our financial situation.
Knowing that, we elected to invest in earthquake insurance to cover the structure of our house, but we passed on insuring all the contents against earthquake damage, which would have nearly doubled the cost of the additional policy. After all, it’s not the loss of the contents of our home that would have a substantial impact on our finances, it’s losing our home entirely, along with the rental income the basement suite produces.
Despite many people having concerns that earthquake insurance will never pay out due to the quantity of claims if it happened, what many people don’t know here in British Columbia, is that if the insurance coverage for a given event was readily available but you simply chose not purchase it, you are immediately eliminated from applying for any type of government funded disaster relief.
So not only do you not have any chance at coverage, your likely not going to get much financial aid from the government either.
Which is why knowing the rules surrounding disaster relief funding in your area is also essential to making informed decisions on the insurance you choose.
At the end of the day, when it comes to knowing which insurance to choose and which to pass on, the best thing you can do is regularly review your policy’s and ask the critical questions. In what area’s are you vulnerable? Would a total loss in any given area significantly impact your financial sustainability, or could you cover the loss with your income sources and savings and forgo the insurance altogether? Can you reduce your risk exposure via a reasonably priced insurance option, or an alternative lifestyle choice or change?
By revisiting these questions and critically analyzing your insurance needs on an annual basis, you will greatly minimize your likelihood of being under-insured, while preventing paranoia and the accompanying overinflated insurance bill.
To keep things in perspective, if worse comes to worse and a health condition, natural disaster or even a divorce lays waste to your financial plans, just remember, if you reached Financial Freedom once, you can absolutely do it again. Despite even the best planning and most frequent analysis, we can’t possibly protect from everything life may throw our way, and though none of us would relish the idea of starting over from scratch, we are all more than capable of doing it.