Survive Life's Financial Emergencies

Expert tps for what you can do to protect your finances before the worst happens.

by Jean Chatzky
Photograph: Illustration: Jonathan Bartlett

Let’s say your annual shortfall is $55,000. One way to ensure you’ll always have that amount coming in each year is to buy an insurance policy that could be either invested or used to buy an annuity that is guaranteed to produce that income. For a $55,000 shortfall, the policy would need to pay out about $1.1 million, according to the calculator, which takes into consideration how long you need the income, how much you require for college and how much you have in savings. To run your own numbers, go to Click on the insurance tab on the menu, and then, in the links under “insurance calculators” on the left, click on “How much life insurance do I need?”

Remember to re-evaluate your life insurance needs every three years or so. If, say, you bought an extra $250,000 in coverage in case you needed to fund college alone and now your youngest is graduating, you may be able to cut back to a smaller policy. And if your retirement portfolio has grown large enough that it could support you without your spouse’s income, you may not need life insurance at all. Conversely, if the market devastated your retirement stash to the point where it couldn’t sustain you if your partner died, then you’d need to rely on a life insurance policy payout. For couples in this situation, “term” life insurance (the kind many people buy when they’re young because it’s cheap) is no longer the best option, because it ends when the policy expires, at the close of whatever term you established. If you want to re-up at the end of the term, you’ll have to pass a physical—and the older you become, the less likely it is that you’ll pass. Instead, talk to your insurance agent about converting your current term policy to permanent insurance. This will increase your yearly premium, but as long as you pay, it will be active for the rest of your life.

You or Your Spouse Becomes Disabled

Death is the biggest worry on most people’s minds, but statistically it’s more likely that you or your spouse will become disabled. So you need a disability policy or long-term-care plan to make up lost income if you or your partner can’t work. And having such a policy is even more crucial for single people, because there may be no one else to pick up the slack if your income is reduced. Either way, if you’re offered group disability through your employer, buy as much as you can (typically plans are capped at 60 percent of take-home pay). If you can’t get a plan at work, buy coverage from an outside insurer. And even if your employer does provide coverage, it’s a good idea to buy a disability policy from an insurer not associated with your job, to bring your total up to 75 percent of your income. Why? If you want to add coverage later on but you develop a health issue, you may be uninsurable to a new provider; but if you already have an outside insurer, you should be able to buy more coverage without having to take a physical exam.

“It’s important to make sure that your benefit amount keeps up with your income,” says financial planner and physician Carolyn McClanahan of Jacksonville, Florida. “People will buy disability when they’re in their thirties and making, say, $80,000 a year. Ten years later, they’re earning $120,000, and they’ve never increased the amount of disability they have—but they have a new lifestyle.” Disability policies generally stop paying when you hit age 65 or 70. Long-term-care insurance can then help pay for nursing or at-home care. Unless you have a family history of illness at a young age, you can usually wait to buy long-term-care insurance until you’re in your midfifties.

Long-term illness may also mean a diminished capacity for handling important matters. Thus, it’s crucial that you not only keep your estate plan up to date but also sign a living will (to specify whether you want life support) and give someone power of attorney for your health care and finances.

You’re Hit by a Natural Disaster

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