Rule #7: Always have a plan and be prepared for the worst.

This section might suck – it’s supposed to. Life is filled with incredible unpredictability. Being financially unprepared when something happens only makes this more difficult. It is important to put aside the fear and discomfort of discussing these things early before they might happen. Of course, I am referring to things like death, illness, injury, career setbacks, property damage, and any other unforeseen events.

The first piece of advice I will give you regards beneficiaries and dependents. On each of your financial accounts, you should designate a beneficiary. This could be a sibling, parent, another family member, or even a friend. Some will argue that this isn’t important for younger folks to worry about, as they don’t have enough monetary funds to make it worthwhile. But adding beneficiaries takes a grand total of 5 minutes, and can be done online or with a quick phone call. You will only need your beneficiary’s name, contact information, date of birth, and social security number to ensure the money finds them if it becomes necessary. Younger folks often lack the necessary estate value to warrant the legal process of will creation, so by designating beneficiaries on P.O.D. accounts (Payable on Death), they are able to avoid the assets going into probate and being distributed by the state. Things change a bit once you have children or dependents. At this point, establishing a Will may be in your best interest. Wills describe both what will happen with your assets and who will care for your children or dependants when you are gone. The creation of a Will should be taken up with an attorney to figure out if it is the right move for you.

Insurance has a bit of a bad rap. There are lots of insurance policies sold that people ultimately never need. I am going to provide an opinion on life insurance that many of us financial advisors share, and I think it is the best course of action for almost everyone. There are two classes of life insurance, and within the second class, three types. Term life insurance is purchased for a set price each month, and provides, for a chosen amount of years, a fixed cash value paid untaxed to your beneficiaries in the event of your death. That was a bit of a mouthful, so I’ll give an example. Mike is 35 years old, has a job that pays $50,000 a year, and a family with a wife and two kids, aged 11 and 14. Mike has followed all the instructions we have guided so far in this book and has invested all the necessary amounts to retire with his wife at 55 years old. Until then, Mike’s yearly salary will pay for his family’s living expenses, his children’s college, and his house and car. Mike expects that at 55, his children will be self-sufficient, and his retirement account will be able to fund the rest of his life. Mike knows life is unpredictable, and he works in an industry that would be considered above average in its danger level. In the case of a tragic event, Mike wants to be prepared, so that his wife and children can continue their life without him as normally as possible.

To do this, he will need a way to provide them with an income equivalent to his salary for 20 years (the age of 55, at which he would retire). The total cash value Mike would need is 1 million dollars (50,000 x 20) to supplement his family for those years. Mike can get an insurance policy that will be able to do this for him. However, that insurance does come with a monthly premium, which we can estimate would be around $53.^[1] We spoke about not skipping on your coffee; definitely don’t skip on your life insurance. Mike will live every day with coffee in hand, feeling reassured that his family will not have to stress over making ends meet if he were to die.

Term life insurance like Mike’s is the most affordable kind of insurance as all the parameters are set. The time frame, amount, and family details are all provided and set in stone. The other class of life insurance is used when families want permanent life insurance, but they want options to change their amount and family details. Permanent life insurance comes in three types: whole life, universal life, and variable life. In many cases, these types of policies are extremely expensive and will provide more detriment to your finances than possible protection. However, I do encourage you to explore all options and ask questions when you begin to look into life insurance. Whole life insurance attempts to insure the client for the entirety of their life. They do this by charging much higher monthly premiums, which are invested by the insurance company in order to build the cash value. This all happens behind the scenes. As the client, all you see is that you are insured for a certain amount for your whole life. There are all sorts of changes that can be made to these, like borrowing against its value, cashing it in while alive, or even having to pay more in premiums if the investments don’t perform.

Universal life insurance takes this even further, letting you adjust your monthly payments and death benefit as you go. This can also cause high costs and lots of effort. Finally, there is variable life insurance, which is basically just like our other two types, except it lets you control the way the premium payments are invested. It is, in all senses, a hybrid investment and insurance account. In almost every case, it is best to keep investment separate from insurance. The more complex an insurance policy gets, the harder it is to monitor and the more expensive it is to implement. With that being said, a combination of prudent asset ownership strategies and calculated use of term insurance will be the cheapest and most efficient way to supplement your family financially.

So now that we have the death stuff out of the way, let’s tackle injury and illness. It is estimated that around 70% of Americans will need some sort of long-term care after 65 years old.^[2] Furthermore, medical expenses for Americans are the highest in the developed world, with the average person spending roughly $12,000 per year on healthcare. To put this in perspective, other wealthy developed countries average slightly above $5,700.^[3] While the politics behind healthcare in our country are absurd and too big a discussion for this book, I will say it is possibly one of the most important subjects to advocate for if you feel like being politically involved. From the research I’ve done, healthcare is an incredibly bipartisan gripe, and the economics behind it are frankly quite horrifying. However, we must work with what we’ve got – and that will mean having plans for illness and injury.

Health insurance is the first line of protection. No person should be without health insurance. If you are employed by a big company, you must be offered health insurance. Under no circumstance should you choose not to enroll in their plan. Given the details of your personal health specifications, it may make sense to have supplemental insurance or be doubly insured. I suggest that you deeply investigate the prices behind the care you receive and seriously consider over-insuring yourself to reduce your out-of-pocket costs in the long run. In some liberal states, it has become commonplace for taxes to provide long-term care insurance. As we detailed before, this is insurance that will help pay for the high costs associated with care for certain chronic conditions in people over the age of 65. If you live in a state where it is not required, you should probably get it. Long-term care insurance is separate from regular medical insurance, mainly focusing on nursing home care, live-in help, and adult daycare. It covers chronic conditions like Alzheimer’s and Dementia. In the case of other chronic conditions, like Arthritis or Hypertension, regular health insurance will help cover the costs of your treatment.

Before we talk about other types of important insurance, it is important to briefly investigate how insurance plans work. Just like life insurance, health insurance requires monthly premiums. These will differ greatly, based on a multitude of factors like age, health conditions, daily habits, and family history. Your premiums will fund the plan and keep it active, but you also must meet what is called a deductible. Think of this as the amount you must first pay yourself before any insurance will kick in. Health insurance plans differ – deductibles can range from $0 to the average of $4,400, to higher than $10,000 in some cases.^[4] Once the deductible is met, insurance comes in. At this point, insurance will begin covering either a percentage or fixed dollar amount of the healthcare costs. Plans will also have maximum out-of-pocket limits – points at which your insurance is required to cover everything. Once your deductible is met, you may still have to pay for medical services, but it will be a whole lot less expensive.

The premium and deductible model also follows car insurance, which is required by law for anyone driving a car. Say you got in an accident and your car was severely damaged. You would be responsible for a certain amount of that repair cost, after which insurance would pay everything. Auto insurance generally doesn’t cost anything after the deductible is met. Lastly, there is homeowners or renters’ insurance, which functions more like life insurance. This covers you for damage, burglary, disaster, and other things that could happen to your home and the items you have there. You are covered to a cash amount and don’t shoulder any costs in the event of a hazardous event if you are paying your premiums. Remember how we detailed that the single-family residence is the most important financial asset most people will have in their lives? Well, what happens to a house that is fully paid off and burns to the ground? If the owners aren’t insured, they are out of luck. They spent 30 years paying that mortgage off, and now their asset is gone. Luckily, this very rarely happens in the real world. Firstly, many banks that lend for mortgages require some sort of homeowners (or hazard) insurance. They will not lend to someone if they refuse to have that property insured. This makes sense, as the bank’s collateral for the loan is the house.

When a bank finalizes a loan, they give the people who want to buy the house cold, hard cash. These folks then go to the market and buy the house using the bank’s cash and their down payment. They move in and all is well. Over the next 30 years, they will pay the bank back. If they can’t pay, the bank has the right to kick them out and seize the property. This is known as foreclosure. The bank will then sell the house, hoping to recoup some of their money. If the house burned down, not only would the borrowers no longer want to make payments on an empty lot, but the bank would also have lost their side of the money. Similarly, when renting an apartment, condo or another residence, the company that owns the property will often require renters insurance. This functions the same way as homeowners insurance and protects the landlords in the case of a flood or a tenant setting the building on fire.

The last piece of advice, which we have already touched on, is the emergency fund. Career changes or stalls happen all the time. Ask anyone how they found their way to their current job.  Rarely will the answer follow a straight line. Before any investing is done for my clients, I always ask them if they have an emergency fund of at least three months of expenses. If not, no investing will be done until that is confirmed to me. I don’t mean to reject people who wish to begin investing, but the simple truth is that without the emergency fund, you won’t be a good investor. Remember how we need to give our assets time to appreciate? Well, if we have no reserves for when times get rough or bad luck strikes, we will be forced to sell our investments – sometimes even at a loss. These investments might not even cover our expenses anymore. This just made our situation so much worse. So, keep at least three months’ worth of expenses in your savings account. This amount should cover housing (mortgage or rent), food, healthcare, and education for you and any domestic partner or dependant. Maybe you trip and fall, spraining your ankle, maybe you catch covid, or maybe your wife gives birth. Whatever it is, the emergency fund will ease the blow, even just slightly.

This was one of the toughest sections for me to write. It is never fun to think about these things. Whether or not the events of injury or illness occur, it is important to be insured. Always have a plan and be prepared for the worst.