When people think about financial planning, they often picture a savings account, retirement contributions or an investment portfolio.
Those things matter. But accumulating money is only one part of a sound financial plan.
A complete plan should also answer harder questions:
- What happens if you face a major medical expense?
- How would the bills be paid if illness or injury kept you from working?
- Would your family be financially secure if you died unexpectedly?
- How will your retirement savings become dependable income?
- Could the people who depend on your planning find the information they need?
Saving builds your financial future. Insurance and income planning help protect it when life does not follow the plan.
1. Could you handle an unexpected expense?
Emergency savings form the first layer of financial protection.
A car repair, home expense, medical bill or temporary reduction in income can create lasting financial problems when there is no readily available money to cover it. The Consumer Financial Protection Bureau notes that even a relatively minor financial shock can lead to debt that is harder to repay.
An emergency fund does not have to appear overnight. Consistent contributions can gradually create a useful financial cushion.
Start by considering:
- Your essential monthly household expenses
- How secure and predictable your income is
- Whether you have access to paid leave
- The deductibles on your insurance policies
- Expenses that would continue if you temporarily stopped working
Keep emergency savings accessible. Money intended for an unexpected expense should not depend on selling an investment at an unfavorable time or withdrawing from a retirement account.
Learn more about building an emergency fund from the Consumer Financial Protection Bureau
2. Do you understand your healthcare exposure?
Having health insurance does not mean every medical expense is paid in full.
Your potential costs may include:
- Monthly premiums
- Annual deductibles
- Copayments
- Coinsurance
- Prescription costs
- Out-of-network expenses
- Services the plan does not cover
One of the most important figures to know is your out-of-pocket maximum. This is generally the most you would pay during the plan year through deductibles, copayments and coinsurance for covered, in-network care.
However, your monthly premiums do not count toward that limit. Out-of-network care and services your plan does not cover may not count either.
That distinction matters. A household could reach its out-of-pocket maximum and still have paid thousands of dollars in premiums during the same year.
Review your health plan before assuming your emergency savings are sufficient. At a minimum, know your deductible, out-of-pocket maximum, provider network and prescription coverage.
Understand total healthcare costs at HealthCare.gov
3. What happens if your income stops?
Most financial plans depend on income continuing.
That income pays the mortgage or rent, utilities, groceries, insurance premiums, loan payments and retirement contributions. If illness or injury prevents someone from working, the consequences can reach far beyond the immediate medical bills.
Ask:
- Does your employer provide short-term or long-term disability coverage?
- How much of your income would the benefit replace?
- How long is the waiting period before benefits begin?
- How long could benefits continue?
- Would the benefit be taxable?
- Could your household manage on the amount provided?
Workers sometimes assume Social Security Disability Insurance will replace their paycheck. Eligibility requirements are strict, however, and the benefit may cover only part of the income a household previously relied upon.
Disability insurance is not appropriate in the same amount or form for everyone. But every working household should understand what would replace its income if a wage earner could no longer work.
4. Is your family protected if you die?
Life insurance is another part of financial planning that is easy to postpone.
The purpose is not simply to leave money behind. It is to protect the people and responsibilities that depend on your income.
Consider what your family might need for:
- Final expenses
- Mortgage or rent payments
- Household debts
- Replacement of lost income
- Childcare
- Education expenses
- Time away from work
- Support for a surviving spouse
- Business obligations
Life insurance provided through an employer can be valuable, but the amount may be limited. Coverage may also change or end when employment ends.
Individual life insurance can provide protection that is based on your family’s needs rather than your current job. The appropriate amount depends on your obligations, existing savings, other coverage and the people who rely on you. There is no single number that works for every household.
5. Can your retirement savings become retirement income?
Building a retirement balance is important. Eventually, however, that balance must support real expenses over an uncertain number of years.
Retirement planning should consider more than the amount shown on an account statement. It should also address:
- Essential monthly expenses
- Social Security income
- Pensions or other guaranteed income
- Healthcare and Medicare costs
- Inflation
- Taxes
- Market changes
- Long-term care
- The financial needs of a surviving spouse
- How long your money may need to last
A large account balance can still create anxiety if there is no plan for turning it into income. Conversely, someone with more modest savings may feel better prepared when essential expenses are supported by dependable income sources.
The goal is not merely to accumulate the largest possible number. It is to understand how your savings, Social Security, insurance and other income sources will work together throughout retirement.
6. Are your beneficiaries and records current?
A carefully designed plan can still fail if the right people cannot access it.
Review the beneficiaries listed on your:
- Life insurance policies
- Employer retirement plans
- Individual retirement accounts
- Annuities
- Other accounts that allow beneficiary designations
Beneficiary forms should be reviewed after marriage, divorce, a birth, an adoption or a death in the family. Do not assume that updating a will automatically changes every account designation.
The IRS notes that retirement plans and IRAs distribute benefits according to the beneficiary procedures established by the plan. Some plans also have special requirements involving spouses.
Review IRS information about retirement-plan beneficiaries
Your family should also know where to find:
- Insurance policy information
- Retirement and investment account information
- Employer benefit details
- Contact information for trusted advisors
- Important legal documents
- Instructions for accessing securely stored records
Passwords should remain protected, but the existence and location of essential information should not be a mystery.
Bring the pieces together
Financial planning is sometimes presented as a collection of separate products and accounts.
In real life, the pieces are connected.
Your emergency savings help you manage smaller disruptions. Health insurance helps limit the financial impact of medical care. Disability coverage helps protect income. Life insurance helps protect the people who depend on you. Retirement planning helps turn years of saving into income you can use.
The question is not simply:
How much have I saved?
A better set of questions is:
What am I building, what could interrupt it and what protection do I have if that happens?
Building wealth is only half the plan. The other half is protecting it.
Review your financial protection plan
Insureous can help you review how your health coverage, life and disability insurance, Medicare options and retirement-income planning fit together.
