The Role of Insurance in the Pursuit of Financial Independence

The Role of Insurance in the Pursuit of Financial Independence

Executive Summary:

There are many unfortunate things that can happen to us that risk our pursuit of financial independence.  Some of them we can manage & control, others we can’t.  For the “stuff” out there we can’t control, insurance allows us to transfer risk to an insurance company in exchange for a nominal premium.

This post covers the role of insurance along your pursuit toward financial independence.  It’ll also cover a prudent risk management framework.  If used correctly, financial independence no longer becomes an aspiration that may happen – it becomes an inevitability.


Financial independence is a goal many of us share here in the America.  It’s also, of course, the focus of this blog.

For the baby boomer generation, financial independence lines up very closely to the traditional American career path: enter the workforce in your 20s, put in 40-45 years, and fully retire sometime around age 65.

Younger generations are starting to explore more creative paths to financial independence, like extreme budgeting and newfangled forms of entrepreneurship.

Whatever your route to financial independence, risk is an important part of the equation.  There are many unfortunate things that sometimes happen in this world that might drag us off course, or even be catastrophic:

  • We could die or become disabled unexpectedly
  • We could wreck our car
  • We could get sick
  • We could get sued
  • Our house could burn down

These are risks that we face every single day. They jeopardize our assets, our ability to earn income or both.

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What No One is Telling You

What No One Is Telling You About Long Term Disability

When someone mentions the word insurance, most of us think of one of three things:

  1. Aaron Rodgers doing a discount double check
  2. The GEICO Gecko using his British accent
  3. The coverage we carry on our cars, our home, our health, or our life

What most of us don’t think of is our long term disability coverage.

Since tangible assets like our cars and homes are easy to visualize, they’re often top of mind when it comes to insurance protection.

But what about the risk that we get sick or injured, and can’t work?

Long term disability insurance is meant to replace our income if this happens.  And coincidentally, our ability to earn a living is probably our biggest and most overlooked asset.

 

Earnings Capacity

Let’s take a moment to think about your ability to earn a living.  Just imagine for a moment what your lifetime earnings will look like.

Your lifetime earnings includes every single paycheck you earn throughout your entire career.  It counts every single raise, every single promotion, and every single bonus.

When you add them all together you’ll get a massive number.  It will be far bigger than the value of your home, your car, and probably your retirement nest egg.

Your ability to go out into the work force and earn this money is your earnings capacity.

 

Now Imagine It’s Gone

Many people consider the possibility that they die, and the impact that would have on their family.  But what if you were hurt or sick and unable to work?

Your family would be left with monthly expenses like a mortgage, utilities, and grocery bills.   They’d also be left without your steady paychecks to afford them.

Plus there’s a chance you might need additional help from a caretaker if you’re permanently disabled.  The end result?  Higher expenses, lower income.

 

It’s More Likely Than You Think

If you’re thinking “that’ll never happen to me,” the statistics would disagree with you.

The social security administration says that 1 in 4 of today’s 20 year-old’s will become disabled for some period of time before they retire.

And if you’re under 45, the chances that you become disabled are far, far greater than the chances that you die.

 

Let’s Think About This

  1. Our earnings capacity is our biggest and most important asset
  2. Becoming disabled is far more likely than we realize
  3. Losing our earnings capacity could cause our family severe hardship

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