Step 6: Protect Your Pay

HEALTH INSURANCE can help us to stay productive and earn an income in the short term. But we also need to consider our long-term earnings, and what would happen if we suffered a disability or—perish the thought—we died prematurely.

We should start by pondering who depends on us financially. If nobody does, we probably don’t need life insurance. But if we have a spouse and children, we might need heaps of coverage. We should think about how much we’ve saved already—and how much additional money our family might need in the years after our death to, say, pay off the mortgage, cover the children’s upbringing and college costs, and help our spouse adjust to life without us. That should drive the amount of coverage we buy—preferably using term life insurance, which will offer ample coverage for a relatively low annual premium.

Our life insurance coverage will help pay costs if we aren’t around. Arguably, our disability policy needs to cover even more expenses—because we’ll still be here. Indeed, if we’re unable to work, we would ideally have a disability policy that not only covers our living expenses until we retire or return to work, but also allows us to continue saving for retirement.

While many folks think of disability as something triggered by an accident, most disabilities are caused by cancer, a stroke and similar health issues—and thus we’re at risk, even if we have a physically undemanding office job. If we don’t have disability insurance through our employer, we should look to buy it on our own.

While life insurance is crucial if we have a family that’s financially dependent on us, disability insurance is especially important if we’re single. Faced with a disability, a couple could live off the other spouse’s or partner’s income. But if we’re single, there might be nobody to fall back on.

Next: Step 7: Buy a House

Previous: Step 5: Shed Bad Debt

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