In the last few episodes, I covered developing plans and habits to grow wealth, but life isn’t always going as per plan. There will be emergencies or unexpected circumstances. We need to make sure those won’t set us back and ruin our lives. Hence it’s critical to have plans to protect yourself, your loved ones, and your wealth.
If you approach a financial planner, typically he/she will enforce this protection as the foundation of one’s life, before taking on any other investment vehicles. However, there are so many insurance products in the market, where should we start? Here is my view (from a non-professional insurance salesperson).
1. Medical Insurance
A medical emergency is the most common emergency we face in our lives. Almost every person will have surgery experience. Without medical insurance, this can be very costly. Shop for a good plan with a reputable insurer, and start it when you are young and healthy so you can get a good premium.
2. Income Protection Insurance
After you settle the medical insurance, you can move on to the next one: income protection insurance. I think it’s very important to understand what is your goal with this insurance: you want to make sure if something unexpected happens to your family’s future income streams, the family can still have a normal life. So priority is to protect the main income earner.
Many insurance salespeople simply call this ‘death insurance’ and ‘critical illness insurance’, in my view this is not good enough. They don’t explain the purpose of the insurance well, and you might end up buying life insurance for each member of the family (even your 1-year-old son) as you think by doing so you are “protecting” your family well. No, in my opinion, you are wasting money. I will explain more about this in the next episode.
3. Long-Term Care Insurance
This insurance is becoming more and more popular and useful today (as the population ages). Please consider this as part of your plan.
4. Self-insure with Emergency Fund
Last but not least, this needs to be part of everyone’s plan. You will need to set aside some liquid-able assets (cash or short-term bonds) as an ‘emergency fund’ for unexpected events. You might lose your job, or have a dental emergency that might not be covered by your other insurance. If both spouses are working full-time, I will suggest the size of the emergency fund be at least 3 months of living expenses; if only one person is working, the emergency fund needs to be 6 months of living expenses. Don’t play with your emergency fund.
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