What would you say if someone asked you to name your most valuable financial asset? Many high earners believe their most valuable assets are their savings and investments. You may have substantial savings in both your home, savings, and investment accounts. They’re the most significant part of your tangible asset portfolio. And yet, none of these is your most valuable asset.
Still, you’ve put protection in place for these types of assets. Despite all this, you may not have safeguards around your most important treasure. So, if it’s not your retirement portfolio or your house, then what’s your most valuable asset?
Your ability to earn.
It underpins everything: your lifestyle, your family, your home, and your future. Unlike most tangible assets, your ability to earn a living doesn’t lose value to hurricanes or earthquakes, stock market drops, or recessions. In fact, it typically grows over time as you build skills, experience, education, and mastery of your field.
But that doesn’t mean you don’t need to protect it. Accidents and illness don’t just happen to older people (or other people). Life-changing events happen every day. By one estimate, 1-in-4 young adults will be disabled before retirement age.1
The proper time to fasten your seatbelt is before an accident happens. Any defenses against loss of income must be in place before the worst happens.
Losing your income, whether over the short term, long term, or permanently, can wreak havoc on your finances, your family, and your future.
Today we'll discuss four perils that you could impact your earning potential.
#1 - Losing My Earning Ability Over the Short Term (6 months or less)
Most of us don't worry about short-term loss of income. You may think this is only something that construction workers or lumberjacks need due to their dangerous work. But knowledge workers get injured more often than you might think!
It could easily happen off the job - say if you take a tumble while mountain biking - and break a bone. There's no way you can maintain your usual pace at the computer or in the office during your recovery - which could take a few months. This could negatively affect your income. Anyone could become injured or incapable of handling their usual 40-hour (or more) workweek!
Questions to ask yourself:
- How long will my savings last if I'm earning little to no income for a few months?
- Do I know how my taxes and future plans could be affected by liquidating retirement investments for income?
- What options are available for protecting my earnings through my workplace?
- Have I asked my trusted advisor how a short-term loss of income will impact my long-term financial plan?
#2 Losing My Ability to Do My Job for a Long Time - or Permanently
Being unable to work for a year or two (or more) is likely to affect your current lifestyle - and your future plans.
Most people plan to work into their 60's or even 70's, and the loss of even a few years of peak income can be devastating. If you're relatively young when you become permanently disabled, two or three decades of income could disappear. This would require radical adjustment of your financial plan. Being forced into retirement because you no longer have the mental or physical capacity to do your job can - and does - happen.
Questions to ask yourself:
- Would my spouse be able to make up some of my lost income?
- What other sources of income are available, and how much of my current income would they replace?
- Have I discussed how to prevent a total loss of income in the event of my disability with my financial advisor?
#3 Sudden loss of life
Nobody likes to think of passing away before they're ready. But, sadly, it does happen. Dying years before your time is certainly tragic and deeply painful to those left behind. And when others are counting on your earnings to pay the bills, it can be financially devastating.
Have you ever considered if your family lost you and your income permanently? What would be left after all your debt is paid off? How long could they afford to say in the home without your income? Would your kids be able to go to college without taking on massive student debt? Your employer may offer a life insurance policy, but the death benefit usually isn't enough to sustain the family long-term or pay off debts.
Questions to ask yourself:
- Can my assets cover any debts I leave behind?
- Do I need life insurance, and how much?
- Will my current life insurance sustain our standard of living for my loved ones long-term?
- Are there other ways that my current life insurance can be used if/when I no longer need the death benefit?
- Have I discussed the impact of sudden death on my financial plan with my advisor?
#4 Complicated Situations - That are often overlooked
What if you're in a car accident that requires long-term hospitalization and rehab? You car insurance will take care of replacing your vehicle. But what's going to replace your income while you're learning to walk (or think) again?
If you're a business owner, it's critical to think about what would happen to your company if something happens to you. Who would do your work? How do you - and your employees get paid?
Or perhaps you're a high earner with a significant investment portfolio that is mostly illiquid. Those assets wouldn't provide you with income in the near term, or cover your debts and expenses in the case of your death. How do you generate a reliable monthly income stream or set aside cash in a tax-efficient way from assets you can't easily sell?
Questions to ask yourself:
- Who else is affected by my death or disability?
- Am I able to access the necessary funds if my portfolio has little cash in it?
- Do I understand the consequences of withdrawing money from various accounts, especially tax-deferred ones?
- Have I discussed options for funding these complicated situations with my financial professional?
It’s critical to take action now to protect your most valuable asset. And your defenses are potentially time-sensitive. Age, health, and potential changes in employment or income may affect your defense strategy.
The good news is that there are a number of ways to safeguard your plan against unexpected income loss. The bad news is that having so many choices can seem overwhelming!
Book your Personal Earnings Protection Call Now!
We'll help you figure out if you have any gaps in your earnings coverage. We're experienced in helping professionals like you get the right amount and type of protection for the right cost.
