Regulate Risk


Six Steps to Financial Freedom, Step Two

Quick, what’s your biggest asset?

Did you say your house, your car, or if you’re lucky your investment portfolio?

Wrong, wrong and wrong again!

The fact is your biggest asset is you.

Step Two in my Six Steps to Financial Freedom is to Regulate Risk. Since your biggest asset is actually yourself and your ability to earn and income that means your biggest risk is the risk of losing that ability. Once you have taken control of your debts and before you start investing you need to make sure you protect yourself and your family from some the unthinkable (and inevitable) events.

Here are some sobering statistics.

–          The average working individual has a 1 in 3 chance of being off work due to illness or injury for more than 90 days at least once between the ages of 25 and 65.

–          The average length of disability is 2.9 years.

–          1 in 2 and 1 in 3 women will develop heart disease resulting in a prolonged absence from work.

–          1 in 2.3 men and 1 in 2.7 women will develop cancer, resulting in a prolonged absence from work.

–          80% of heart attack patients make a full recovery.

–          100% of deaths are permanent.

Regardless of what the personal opinion and compassionate position of your banker might be, the bills will keep coming. Nothing can derail your retirement plan or increase your debt faster than an unexpected illness or the premature death of a wage earner.

As a result before you start investing I strongly recommend you carry 4 types of insurance. Depending on your employment situation not all of these products are necessary for everyone and budget is always a consideration but these are the basics.

1 – Health Insurance.

healthplan

The good news is that most employers offer some form of group health plan to their employees to cover prescription drugs, dental and other incidental health care related costs. Many health insurance plans also include a small amount of Life and Disability Insurance. In most cases however the Life and Disability portion is very small and severely restricted, read the fine print and ask a licensed insurance specialist to help you interpret what it all means. There is nothing worse than surprises when it comes time to make a claim. And of course, once you leave your employer you no longer have coverage. If you work for an employer who does not offer a group plan, or you are self-employed look into getting some personal coverage, it may seem expensive at first but believe me, no one who makes a big claim for cancer treatment or restorative dental work ever says they paid too much for their insurance.

2 – Life Insurance.

coffin

Despite what you might think dying is not a get out of debt free card. Especially for the people you leave behind. The number 2 cause of bankruptcy in North America is the early death of a wage earner. If you carry debt – get life insurance! Even if you don’t carry debt or your spouse thinks they can handle it without your income you should still get at least enough insurance to cover the cost of a funeral. The average cost of a funeral in Canada is $12,000 add to that final expenses related to a prolonged illness and possible legal fees incurred in settling your affairs and the cost could easily exceed $15,000 or $20,000. It just makes good sense to make sure the last thing your loved ones remember about you it’s how much your funeral cost.

3 – Disability Insurance.

injured

Back to point one, most employers offer some form of Disability Insurance within their group health plans but read the fine print. Most group disability coverage only starts paying after you’ve already been off work for several months and stops paying after about two years. From the stats above we know that the average length of disability is closer to three years and that’s if you’re lucky enough to even qualify under the definition of disability in your plan. Many policies define disability so narrowly that even though you can’t do your job, if you can do any job at all for any amount of pay, you don’t qualify. Think about that for a minute.

A personal disability insurance plan tailored to your income and special skills, even in conjunction with a group plan, might be the difference between making your mortgage payment or being forced to sell your house and move to a cheap apartment.

Any guesses as to what’s the number one cause of bankruptcy?

4 – Critical Illness Insurance.

sick

Many critical illnesses, cancer, heart attacks etc, have a fairly quick recovery time and as you can see by the stats above, medical science has given us a pretty good chance of surviving. You could have a heart attack and be back to work, at least part-time in less than a month. You could be taking cancer treatments in the morning and going to work in the afternoon. If that’s the case you might not be off work long enough or have your hours reduced enough to qualify for disability insurance. But the economic cost could still be significant.

Disability Insurance only replaces your income it does not cover the cost of one-time expenses like home renovations to accommodate a wheel chair or expenses associated with a long hospital stay. Things like extra commute costs or the loss of income from a spouse who takes time off to be with you for example are not generally considered in a disability insurance claim. That’s where a critical illness policy becomes valuable it provides a one-time lump sum payment at the time of diagnosis to help cover initial expenses associated with the condition.

As you can see there are quite a few areas of risk associated with your ability to earn an income that need to be addressed early in your financial plan.  When bad things happen, it doesn’t take long to wipe out a retirement nest egg if you aren’t prepared with a proper amount of insurance. The exact structure of an insurance plan is different for everyone based on your budget and how exposed you are but the bottom line is this; if you have any debt, a job or are currently breathing, you are exposed to risk that a good health, disability and life insurance plan can mitigate and you should do that before you invest a dime.

Next week we’ll look at step three, Rule Retirement.

If you have any questions or would like more information on how to Regulate Risk in your life write to themeekonomicsproject@gmail.com

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