This is a piece in an 8 part series on getting your financial house in order. Here are the rest of the posts. Please read them sequentially and hopefully, it will help you on your path to financial independence.
- Setting up a budget/expense report: Ever wonder what should be included in a budget? We cover what you may want to consider. You can also sign up for our email list and download our free Budget crushing tool!
- Determining net worth: Do you know how to calculate your net worth? We discuss how to do it and if things like your home or cars should be included? Check it out to see what I do.
- Get you some insurance: Here we discuss what insurance you need for your family? Is an umbrella policy really necessary?
- Setting up a will or living trust and What to place in a living trust: How do you protect your family with a living trust? Why would you want one and how much will this cost? How do you do it? Check out these posts to figure it out.
- Max out the 401K, 403b, 457, or Government TSP: Ever wonder what these different accounts are? How much can you put into one versus the other? Is a Traditional or Roth plan right for you?
- Start an IRA: What is an IRA? Should you have one? How do you do a backdoor Roth?
- Pay down debt: As Dave Ramsey says, debt is bad. Still which debt should you pay down first and when can you consider paying down debt versus investing.
- Start tax advantaged accounts: Once you have done the above, what is the next thing to do with your money?
Get you some insurance
Insurance is the greatest bet you can take. For a small amount of money, you bet against bad things happening in the future. Insurance is a must have if you are the breadwinner, not financially independent, and have dependents. Don’t underestimate that bad things can happen and do happen all the time.
For instance, last year I had a friend who was walking on the beach and a wave took him out. He snapped his neck, flew to the states for surgery, and is on long term disability. If he had not had disability insurance his family of 4 would have been screwed. If he had died and did not have life insurance his family would have also been screwed.
So here are the types of insurance everyone should consider buying an why:
As I said my friend got rocked by a rogue wave. There is both short term and long term disability. Most employers offer both, but you should consider also buying a private policy. These plans can be quite variable. Short term disability insurance typically covers between 1 to 3 months of a portion of your salary. Long term disability covers your salary once short term disability is gone.
Pay attention to what portion of your salary the disability insurance pays. For instance mine pays 60% of my income. This money is not taxed and therefore 60% of disability income is actually worth more than 60% of my real income.
Also pay attention to what qualifies you as disabled. If you are a surgeon, you want a policy that will pay you if you cannot do surgery. Some policies state that if you can do any other job (like see clinic patients or teach), then you are not disabled and they won’t pay. Therefore, the fine print is important. Once again, make sure the policy pays you if you can not do your daily job (i.e. surgery, procedures, etc).
Term life insurance
If you have dependents and are not financially independent then you must have term life insurance to cover funeral expenses and living expenses if you die. Term life insurance typically goes until age 60 or 65 and is relatively cheap. If you are financially independent at age 45 due to great planning, then great you can give up this insurance along with your disability insurance.
For most people term life will be necessary until age 55 or 65. At that point the kids have grown and the retirement income (IRAs, 401Ks and Social Security) begins being tapped.
The amount needed is variable and needs to be determined by annual expenses for a number of years. For instance, as the sole breadwinner a person may need more term life then if their spouse also earns an income.
Basically term life is protecting the family against a tragedy. In our family I am the sole breadwinner currently but I have a term life insurance for my wife as I understand that if she dies I will be devastated and need time off from work to cope and help our son cope. As I am not financially independent and we have a mortgage and my school debt, I have decided the small monthly payment for her term life insurance is worth it. If I die the financial implications are much higher for the family and so my policy is much higher than my wifes.
A good auto insurance policy is key. Cover the damage done (and mitigate liability) if you crash into someone else and they need medical care, etc. We do not have fancy cars, and therefore our coverage only covers collision and damages to other’s cars and their medical expenses.
If our house burned down, we would be in trouble. We still owe a mortgage and need insurance to cover the costs of lost items in the house. We did have flood insurance when we lived in New Orleans but have not taken out earthquake insurance while living in Northern California.
Review these additional insurances and take into account where the house is located (literally details such as how high above sea level for flood insurance or is the house sitting on granite for earthquake insurance). Each region has their own recommendations and it should be taken seriously. For instance, the poor people of Baton Rouge who got flooded this year (2016). The majority did not have flood insurance and their home insurance will not cover the damage as discussed here.
For a high income earner or one of high net worth considering a relatively cheap umbrella insurance is a good idea. This insurance sits and waits for something so bad to happen that it eats up your auto or home insurance and still is hungry. Say their is a law suit for 1 million dollars and your auto insurance only covers $500,000 in claims, then the umbrella kicks in to cover the other $500,000. We have a umbrella policy and it only costs a few dollars a month.
That is it. If you obtain the above insurances (plus or minus umbrella) then your families financial future is protected! Simple as that.
I am Eiman Jahangir and I am a dad, husband, and cardiologist. I grew up in the South, trained in the Northeast, moved out West, and now am happily back home in the South. My wife and I have seen our fair share of ups and downs, from the pain of dealing with infertility and losing everything in a matter of hours in the Tubb’s Wildfire, to the joys of having our son and finally finding a medical practice that is right for me. It hasn’t always been easy, but I am grateful and continue to move forward in positive steps.
I write to help people looking to improve their lives. I have written my thoughts and experiences on a wide arrange of topics from parenting to finances to mindfulness. While some of my posts are more useful for doctors and other high earners, most are for everyone.