These Two Types of Insurance are Critical for Protecting Your Family Finances
When saving for the future, many people focus mainly on investing and growing the money they have. That’s important because you will likely have some big expenses in life: college for your kids, a home, maybe a wedding someday and, of course, retirement. But when you focus only on saving for your future, you’re missing a big part of financial planning: protection.
Rick Hu, 31, a financial professional at Northwestern Mutual, says that he often meets with clients in their 20s or 30s who are saving for their future but aren’t well protected. An illness, an accident or a death could easily leave them without the ability to earn the income they are using to save for their family’s future and pay their bills today.
“The majority of the people I sit down with are under insured in my opinion,” he said. Many don’t have any disability income or life insurance while others don’t have adequate coverage.
There are a variety of reasons, but the most common tend to be that they falsely believe they don’t need disability income or life insurance, that they are fully covered by their employers or that they can’t afford it.
“Another reason is that we’re taught that investing and saving for your future is just something you do,” Hu said. “But, unfortunately, we aren’t taught that about buying life or disability income insurance to protect our families and we should be – because it’s just as important.”
Hu often sees that when young people learn about the importance of protecting their income and their families, they take steps to ensure that coverage is in place.
Life Insurance Is Critical for Protecting Your Family
Life insurance isn’t something many young people think about. The young clients that Hu does see have often experienced a tragedy that motivated them to buy coverage.
For one client, having her father pass away at a young age drove her to buy life insurance when she was just 27 years old.
“Having such a dramatic loss in her life made her and her fiancé realize that sooner or later everyone needs protection,” Hu said. When they later had children, they added to their coverage.
Protecting children is one of the main reasons many of Hu’s young clients get life insurance.
“Those with young families often have less of their mortgages paid off and have fewer assets than people who are older,” said Hu. “So their death could devastate their family financially.”
But even if young people don’t have a family, student debt could be motivation enough to buy life insurance.
Having life insurance may also offer benefits you can take advantage of during your life. For example, over time permanent life insurance builds equity or cash value which you can access at any age for any reason. You can use the value to cover an unexpected emergency, pay for your child’s education or make a down payment on a second home. (Note that utilizing the cash values could reduce the death benefit.)
While many young people don’t have any coverage, others don’t have nearly enough – often because they falsely believe that the life insurance offered by their employers is sufficient.
But Hu says his clients “are often surprised at how little coverage they receive from their employer.”
Generally, employee plans offer one or two times your annual salary in life insurance. But Hu said that won’t go very far when you consider funeral expenses, debt, your mortgage, your children’s education or child care.
“If you add up all those things,” he said, “the majority of the time, the employer’s plan is never enough to fully fund everything.”
Disability Income Insurance Protects Your Biggest Asset
When it comes to disability income insurance, Hu believes it is just as critical for young people.
While many people in their 20s and 30s don’t expect to need disability income insurance, the Social Security Administration predicts that one in four 20-year-olds will become disabled before they retire.
Losing your ability to make money could devastate your family financially or leave you without funds to care for or support yourself. Hu recently had a 30-year-old client purchase disability income insurance because he realized that “if his income stopped, his mortgage payments would stop, his retirement savings would stop, his children’s education payments would stop, and his ability to put food on the table and take care of his family would also stop,” Hu said.
“For Millennials, our income is our largest asset,” Hu added. “If you can expect to earn at least $50,000 per year for the next 40 years, that’s $2 million worth of income that you should be protecting.”
That’s why it’s so critical for young people to be properly protected. Typically an employer-sponsored disability income plan isn’t enough, as it generally replaces only a fraction of your income if you become disabled.
“The same plan is typically given to all employees regardless of their specific backgrounds and financial profiles,” Hu said. Without supplementary coverage, it often means that those employees are underinsured. And if you leave your job, another downside is that you can’t take this plan with you.
Insurance Can Provide Peace of Mind
Most young people want to protect their families but believe that both life and disability income insurance are too expensive and won’t fit into their budget. That isn’t the case, according to Hu.
“That’s a huge misconception,” Hu said. There are a number of different types of plans and options available that make insurance affordable on any budget.
“The most expensive insurance to own is having no insurance,” said Hu. “If people have no insurance and something happens to them, their loved ones are responsible for all the financial responsibility and obligations that occur afterward.”
Hu’s clients sometimes have to make small financial trade-offs to purchase insurance. One client doesn’t shop at expensive grocery stores anymore. Another no longer goes to get his hair cut every week.
But these clients are happy to make these small sacrifices because they know their plan to grow their wealth is protected. “There are a lot of things you can’t control,” said Hu, “but the one thing you can control is that you can protect yourself and your family in case you get sick, injured or die.”