Do You Need Financial Earthquake Insurance?

March 07, 2016

Think of a financial shock that could totally knock you off your feet. That’s a financial earthquake. Unemployment, an illness, divorce, the death of a spouse, the loss of a home or a business – a financial earthquake is unexpected, unpleasant and unwelcome.  

Just like an actual earthquake, the frequency of financial earthquakes can be predicted, but no one knows for sure to whom or when they will occur.  Protecting yourself and your family from the disastrous effects of a financial earthquake is not hard, but does take some allocation of resources to build a strong foundation of emergency savings and to pay insurance premiums. While conservative savings and insurance protection aren’t the most exciting part of financial planning, they are the most important.

Health Insurance

In my twenties and early thirties, I had periods of time where I didn’t have employer-provided health insurance coverage. There were a few years where I decided to roll the dice and not purchase expensive individual coverage. That was incredibly foolish! Three in five bankruptcies are due to unpaid medical bills. Luckily, now even if you are self-employed, you have a  pre-existing medical condition or your employer doesn’t provide insurance, health insurance coverage can be purchased under the Affordable Care Act.

Emergency Savings

According to a Pew Charitable Trust Study, six in ten Americans had an unexpected, negative financial event during the past year. A large number of Americans are not even minimally prepared for a financial tremor, much less an earthquake. 41% do not have enough savings to deal with a $2000 financial shock such as a major car repair or emergency medical bill. In our recent Year in Review Report on Employee Financial Trends in 2015, Financial Finesse found that 51% of employees do not have enough of an emergency fund to pay bills for a few months if they lose their job. A startling 25% of employees over age 65 had no emergency funds at all heading into retirement.

As fellow planner Michael Smith recently wrote, you need a Plan B. If you don’t already have an emergency fund, start by saving a small amount every day by tweaking your spending habits. By saving $5-$10 per day, you could build up a $600-$1200 cash reserve in just four months and in a year, you could save $1,800-$3,600. Over time, aim for 3-6 months of living expenses in savings. Use this goals calculator to see how little changes can add up to big savings over time.

Income Replacement If You Can’t Work

What happens if your income is interrupted due to a long illness or recovery from an accident? Disability insurance provides replacement income in the event you can’t work. Access to group disability insurance as an employer-provided benefit varies by industry, but only 25% of employees have access to both short and long term disability coverage.

This calculator can help you figure out your income replacement needs in the event of disability. If you have access to short and long term disability insurance coverage at work, please choose it during your next open enrollment period. If you don’t, consider these factors when shopping for an individual policy.

Life Insurance

Does anyone depend on your income to maintain their standard of living?  If yes, you probably need some form of life insurance. If you are single and don’t have children, then you probably don’t.

According to a Bankrate Survey, six in ten Americans have life insurance, but many have insufficient coverage. For most people, the place to start is basic term life insurance. How much do you need? Use this calculator to estimate.

Accept That a Financial Earthquake Will Happen

The probability of any single given event – a medical emergency, a job loss, a car accident, caring for an additional family member, a business failure – is low. In total, however, the probability that any one of an assortment of individually unexpected events happening is higher. You may not know when life is going to throw you a loop, but it’s coming.

Is it a big one – long term unemployment or a devastating illness? I hope not. Could it be a smaller tremble like a broken hot water heater or getting rear ended? Most likely. Will you be prepared?