I’m going to guess you don’t usually think along these lines, right? Except you probably do think about life insurance and know you should have it.
If you die, you stop earning money. (We learned that in Financial Planning 101.) But life insurance makes sure that the people you leave behind still have the money your income would have provided.
Dying is not the only way to lose your income. What if you instead:
- Become disabled?
- Lose your job and can’t find a new one?
- Lose your job and can’t find one that pays as much?
You can protect your income against all these threats, sometimes by buying something and sometimes by doing something.
A note about “protecting income” vs. “covering expenses”: Ultimately, these tools are less about “protecting income” as they are about ensuring your ability to cover expenses and afford your goals. If your expenses (now and in the future) are far less than your income, then you likely don’t need to protect your whole income. You need to protect enough of it to cover your expenses.
Although most of my clients talk about life insurance, losing your income to disability is much more likely to happen than losing your income to death. According to this website, one in eight workers will be disabled for five years or more during their working careers.
And to protect your income against disability, you need disability insurance, especially long-term disability insurance. Thankfully, most established tech companies offer long-term disability insurance to their employees. Most commonly I see company policies that replace 60% of the employee’s income, at no cost to the employee.
This isn’t a “how to buy disability insurance” post, but let me mention a few notables:
- If your employer pays the premiums, the benefits will be subject to income tax. If you pay the premiums, the benefits will be tax free. You might see how a “60% replacement rate” is a lot different depending on whether that replacement income is then taxed or tax-free.
- Group policies (through your work) are probably much cheaper than private policies.
- Good ol’ Ron Lieber at the New York Times goes into more detail in “Questions to Ask Before Buying Disability Insurance“
What about short-term disability insurance, to cover disabilities that keep you out of commission for under 90 days? You can buy private insurance for it, but often short-term disability insurance isn’t necessary:
- Your company might provide it for you.
- Some states (like California; here’s a full list) provide it or require your employer to.
- You can prepare for it by building up a robust emergency fund. “Short-term” usually means about 90 days (though it depends on your insurance policy), so if your emergency fund can cover all your expenses for 90 days, you should be good.
I usually recommend that you buy a private, individual life insurance policy, instead of relying on group coverage through your employer. When you leave your job, the last thing you want to worry about is replacing the life insurance coverage. A private policy will simply be always be there, assuming you continue to pay the premium. (By contrast, I usually recommend you buy disability insurance through your employer, because group policies are usually so much cheaper and don’t require a medical exam.)
You are, of course, protecting your income not for your own sake, but for the sake of the people you leave behind. (I can never tell if my ease of talking about life insurance and estate planning is a testament to my Extreme Professionalism or just a morbid commentary on my character…)
Losing Your Job and Not Finding a New One Very Soon
No, there’s not some magical insurance product (that I know of!) that allows you to actually continue receiving your income after you lose your job. I mean, other than a severance package.
So, addressing this risk requires you to do something, not buy something. Actually, two somethings:
- Build up a robust emergency fund.
Yup, cash that’s just going to sit in your bank account earning next to nothing (though Janet Yellen might be slowly taking care of that). The rule of thumb for emergency funds is 3-6 months’ worth of expenses. In the hot technology market right now, maybe that’s just fine. But maybe not, and certain the tech industry won’t always be this hot.
- Regularly grow and strengthen your professional network and skills.
Okay, so maybe this is a semantic stretch, but my point is valid! While you’re still gainfully employed, don’t let your professional mojo fade. Tarah Wheeler Van Vlack, in her recent book Women in Tech: Take Your Career to the Next Level with Practical Advice and Inspiring Stories, recommends you add 10 hours/week for professional development, between building skills and networking.
Losing Your Job and Not Finding One That Pays As Much
Just like above, except you might have to prepare for longer effects. Because even though you’ve gotten a job, now you’re at a lower level of income for perhaps a long time to come. When this current dot-com bubble bursts, you might see a lot of this.
So, not only do you need to:
- Build up a robust emergency fund that you might continue to draw from even once you get this new lower-paying job, and
- Continue to cultivate professional resources, but
You also need to tackle the expenses side of the equation on a longer-term basis, because your income is now lower on a longer-term basis. It’s not just about “I can forego new clothing/vacations/restaurant dinners until I get an income again. It’s “What expenses can I permanently eliminate.”
(And I don’t mean that to sound dire or unpleasant. Most of us spend a lot of money without thinking about if it’s really aligned with our values.)
So, sure, you can wait until you’re in that situation to reduce your expenses. But that sounds unpleasant. You’re already going to be pretty stressed out. Why not evaluate your finances and your spending ahead of time, eliminating those expenses now? It’ll enable you to build a bigger cash cushion plus make the transition to a lower salary that much easier.
In Conclusion! While many people equate “financial planning” with “investing,” I tend to equate it with “risk management.” Protecting your income in these diverse ways helps manage your risks . And in diversity is strength.
Question: How do you protect your income? You can leave a comment below.
Do you want someone to help manage the risks to your financial life so you can focus on financial and professional progress? Reach out to me at firstname.lastname@example.org or schedule a free 30-minute consultation.
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner and/or an accountant for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.