Sometimes, months of layoff rumors precede a job loss. You hear whispers of cutbacks and people not getting their raises. Other offices start to close, and you’re pressured to work harder and cut costs.
At other times, a job loss happens with absolutely no warning. Your business closes, you get fired, or you become disabled and unable to work.
If you get fired or laid off from you company, you might draw unemployment for a little while. Unfortunately, the bills won’t stop coming even when your money disappears. That can spell very bad news for you. The last thing you want to do when the unexpected happens is to find yourself without a plan. If you lost you job tomorrow, would you survive financially? Disaster-proof your finances now before it’s too late.
About 70 percent of people own life insurance policies, but only 40 percent invest in disability insurance. In reality, it’s probably more important to protect your current income before investing in life insurance. A 20-year-old today has a 30-percent chance of becoming disabled and missing at least six months of work before retirement. You might think you can fall back on government benefits for disability, but they vary widely depending on where you life. In the U.S., for example, people draw an average of just $1,188 for Social Security disability.
Disability insurance costs more than life insurance. The average private disability policy costs $18.60 per $1,000 of coverage versus 22 cents per $1,000 of coverage for life insurance. However, if you purchase disability insurance through your employer, you often get a cheaper policy. The average employer disability policy costs just $16.30 per $1,000.
Don’t worry about disability insurance if you make less than $30,000 per year or if you’re over 65. In these cases, you can get as much from public benefits as you will from your policy.
Also, if your injury results from an accident or workplace negligence, you can contact personal injury attorneys about getting a settlement. However, if you’re the family breadwinner, and you can’t live off of savings and investments if you can’t work, then you need disability insurance. Keep these tips in mind:
Pay your premium with after-tax money. When you pay disability insurance premiums with after-tax dollars, all disability benefits that you could receive become non-taxable. Even though your premiums would cost less if you paid for them with pre-tax income, you’d save a lot of money — if you actually became disabled — by making sure that you don’t owe taxes on the payouts you receive.
Expect only partial income replacement. Most disability payouts cover only 50 to 70 percent of your salary. Again, you can bridge the coverage gap by making sure that your payouts aren’t taxable. Pay your premiums with after-tax dollars.
Search for ways to lower costs. You can pay lower premiums by accepting a lower percentage of your salary, such as 50 percent instead of 70 percent. Also, you can pay less by accepting a longer waiting period for payments to begin, such as accepting a 90-day waiting period instead of a 30-day waiting period.
Traditionally, financial advisors have recommended having three to six months of income in your savings account. Unfortunately, the recession of 2007 changed a lot of the old rules. Today, 36.7 percent of people who don’t have jobs have been unemployed for more than six months. With such a tough job climate, boosting your savings rate becomes almost non-negotiable.
Saving eight to 12 months worth of income might seem drastic. You might say, “I have enough credit on my credit cards for three months worth of income.” However, if you depend on credit cards for savings, remember that you’ll have to pay it back at a high interest rate when you find a new job. You’re better off building your nest egg and avoiding high-interest credit card debt.
Other Streams of Income
Creating multiple streams of income gives you more buying and investing power in the present. These income ideas also provide fallback money if you lose your job. If you can afford it, invest in some rental property, or put some extra money into non-retirement securities. You can also develop extra assets that earn passive income, such as a blog with affiliate links or a book that earns royalties.
Passive income, combined with adequate savings and good disability insurance, can ensure your financial survival in case you find yourself unemployed. Instead of having nothing but unemployment payments, you’ll have financial peace of mind. It’s time to disaster-proof your finances as early as now.
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