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Feature/General
Is Your Life in Order? The Key to a Good Foundation
By Nelson Holland
Nov/Dec 2006

Keys to family financeSeveral years ago, following a conference I attended, I was on the bus returning to the hotel when an older gentleman seated beside me turned and asked me a question in a fatherly fashion: "If you were killed in an auto accident by a negligent commercial truck carrier and could return for five minutes to advise your family on initiating a potential lawsuit, what amount would you advise your family to settle for in providing for their security?"

At that time I was in my early thirties, married, with two young daughters. I replied that I would probably add together 8‑10 years of my present income, calculate a conservative interest rate, and invest that sum of money to provide for at least a 12‑15 year period for my family. He promptly told me that my response was certainly the approach an attorney would utilize in reaching an eventual settlement for my young family. He then closed by asking me a final question: "Do you own that amount in life insurance?  If not, why not?" I certainly had food for thought that day. In fact, it's something we all need to consider as we seek to care for our family.

While this brief conversation is somewhat oversimplified, it begins to address a key element in planning our finances. A life insurance policy can replace income to help family survivors maintain their mode and standard of living, provide needed funds to make mortgage and debt payments, raise and educate children.  Basically, human life has an economic value. While parents should have a thorough professional review of their benefit plans at least every two to three years, one typical life insurance goal for a provider might be a range of 7‑10 times his/her annual income. For example, if your annual earnings are $50,000, that amounts to $900,000 over 18 years or in present value terms, $664,000. The value for a stay‑at‑home parent may seem more difficult to assess, however, a licensed consultant can help you arrive at an appropriate value based on your situation.

Yet another question you may want to ask yourself is "how long can I go without a paycheck in the event I am too sick or hurt to work?" If your answer is "not very long," there is a definite need to consider a short‑term and long‑term disability plan. This is an often neglected benefit which is equally as vital for most parents. In many cases, this is provided by an employer as part of their employee benefit package.  If that is the case, your short‑term disability plan will typically replace a portion of your weekly earnings for 30, 60 or 90 days. This is followed by a long‑term benefit which typically starts after 90 days of disability and can replace up to 60% of your monthly earnings in the event of a total disability for up to two or five years, or until you reach age 65. The cost for employer‑sponsored plans is relatively low. Keep in mind that in the event of a disability, money received from a company‑sponsored short‑term/long‑term benefit plan is considered taxable income. In reality, the tax lowers the original amount you are trying to replace so as you examine these benefits, it's important to know what you have and to review your monthly budget to determine if the after‑tax amount received would be adequate. If it's not, you'll want to consider an individual plan as a supplement. Under certain conditions, there are even disability plans available for stay‑at‑home mothers. Today, we are living longer, yet we are more likely to experience some type of disability. And in a society where many of us carry high levels of personal debt, disability insurance is a vital part of protecting our income.

Due to the increasing cost of healthcare, many companies do not offer disability or life insurance coverage to their employees.  If this applies to you, seek the advice of a competent benefit consultant toward obtaining coverage for your family. Sometimes individual plans can seem "pricey," yet there are many techniques a seasoned planner can utilize in order to fit the maximum amount of benefits into your monthly budget. In addition, there is the added advantage that individually owned plan benefits are not considered taxable income.

In your planning, consideration should also be given to establishing an emergency fund consisting of at least 3‑6 months of savings. This money should be in an account that is readily accessible in order to take care of potential short term sicknesses, injuries, or even loss of a job.  Financially speaking, while this does not substitute as a comprehensive plan, far too many families live on the edge, where the loss of a job or even a short term sickness or injury can place a significant financial burden upon their family.

Most of us just don't like to think of becoming ill, injured for a period of time, or dying.  As a result, some fail to implement adequate financial plans. By not doing so, you are choosing to assume all of the financial risk in the event of a loss and put your family's financial future in jeopardy. It certainly makes sense, and is far better economically, to transfer this risk to an insurance company in exchange for a relatively small premium. If you are in good health, consider that term life insurance rates have gone down in recent years and disability income plans are typically less than 2% of your income.

Without adequate levels of life and disability coverage, most Americans' financial and retirement plans are in serious jeopardy in the event of one's premature death or disability.  A comprehensive plan consisting of adequate amounts of life and disability insurance are the foundation upon which a successful financial plan is built. Is your life built on a solid foundation? 

Nelson Holland, CFP®, ChFC, CLU is the President of Holland Financial Services, Inc. in Athens, GA.  Mr. Holland has served on the State Board of the Institute of Certified Financial Planners and is an adjunct Instructor at The University of Georgia in the Certified Financial Planner Program.


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