Protect Your Family Against a Loss of Income

Jane Young, CFP, EA

Jane Young, CFP, EA

In addition to an emergency fund for unexpected short term expenses, you need to protect yourself and your family from a long term loss of income.  If you have a spouse or children who are dependent on your income, you should consider term life insurance and long term disability to provide them with income should you die or become disabled.  If you have no dependents, you should consider long term disability to cover your own living expenses if you become unable to work.  

Although, life insurance can be a dirty word, low cost level term insurance is relatively inexpensive and provides an important safeguard for those who are dependent on your income.  Some common reasons to buy life insurance are to replace income, pay-off a mortgage, and to put your children through college.  The most economical way to meet these needs is through the use of level term insurance.  The amount of insurance you need depends on your objectives for getting insurance.   The term of the insurance should be based on the timeframe during which you need to replace income or pay for other major expenses.   When you buy level term insurance, you have a guaranteed level premium and a guaranteed death benefit, assuming you pay your premiums on time. Unlike whole life insurance, term insurance is pure insurance, there is no investment element.  Once the term has expired there is no residual value. 

It is common to buy level term insurance to cover 20 or 30 years until such time the kids have made it through college or your home is close to being paid off.  To save money, you may consider purchasing several policies with different terms and different objectives. For example, if your mortgage will be paid off in ten years, your kids will be out of college in 20 years and you want to provide your spouse with income replacement for 30 years, buy three policies with terms that correspond with the timeframes of your objectives.

Many people buy life insurance but few people have long term disability insurance.  No one lives forever, but during your prime earning years the probability of becoming disabled is higher than that of dying.  According to the Social Security Administration, over 1 in 4 people who are currently 20 years old will become disabled before age 67.   About 69% of all private sector employees have no long term disability insurance.  If you have loved ones who are dependent on your income, you should consider buying long term disability insurance.

When shopping for life insurance and long term disability shop and compare prices. Do your research and get quotes from several companies with low fees and commissions.  Consider working with insurance brokers who work with a variety of different insurance companies.  They can provide you with information on premiums from several insurance companies along with the companies’ financial strength rating.

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