Protection Planning Basics
Adequate and appropriate levels of Cash Reserve and insurance are part of what forms the base of a sound financial plan. Having enough “ready cash” to weather an unexpected expense or a period of unemployment is an essential pillar of one’s financial house. The other pillar is any needed insurance. Insurance transfers risk onto an insurance company and away from the insured party. As a first step in the planning process we work with our clients to help ensure that the foundation of their financial life is in place.
A Cash Reserve rule of thumb is to have between 3-6 months’ worth of core expenses in a fully liquid, FDIC insured account. This would be things like savings accounts or money market accounts. The important thing is to be able to have access to it within a few days, if needed. There are ways to structure it in tiers in order to get a bit more interest on these funds without compromising liquidity.
Typically, the greatest financial risk, early in one’s working life (even midway through), is a loss of income. With a decade or more years left before retirement, a serious injury or disabling event would potentially derail most financial goals. Although it can be unpleasant to think about, the possibility exists of one falling sick and not being able to work, so addressing this risk is one of the most important steps in the planning process. Individual Disability Income protection is a type of insurance that can cover the gap between one’s employer-provided long-term disability insurance and the actual need in the event of a disability.
Life insurance is a need in all phases of life if there is an insurable need. An insurable need is created by having dependents or liabilities – anyone or anything that would need support in the event of one’s death. Life insurance is fairly straight forward. As long as premiums are paid during life, a death benefit is given to one’s beneficiaries at the death of the insured. Determining how much death benefit to buy is a process of calculating the amount needed to cover liabilities and to provide for the needs of beneficiaries (college tuition, support for a spouse etc.). Life insurance can be either temporary (Term insurance) or permanent (Whole Life insurance and various iterations of such).
As one approaches the last decade of work life, Long-Term Care Insurance becomes a need. The sweet spot for securing this essential insurance is between 50 and 60. That is because typically one has not yet developed a condition that would prevent them from being approved, while at the same time, being old enough to not be paying the premiums for longer than necessary. We all die of something and before that we get sick and often need care. This type of care is expensive. The average cost of assisted living in New England ranges between $7,000 and $9,000 per month. Most of that is not covered by health insurance or Medicare so it can be a real hardship for the family. Securing Long-Term Care insurance provides one with an alternative pool of assets for in-home, assisted living or nursing care, thereby protecting retirement assets for the remaining spouse or surviving family. Getting Long-Term Care insurance is a loving thing to do for one’s family.
Most of us don’t have enough assets to self-insure, meaning to cover all of our needs in emergency or crisis circumstances. Therefore, having enough Cash Reserves and the right amount and type of insurance is an important part of planning, in fact it is the foundation of all other financial planning. When it comes to protection planning the Boy Scout motto is very apt: “Be Prepared”.
