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