Your income-earning potential is your most valuable asset. Your income guarantees that the bills are paid, college tuitions provided, your family's lifestyle maintained. Here are two ways to help protect your income-earning potential:
- Did You Know...?
Investing is not the best way to protect your income. Even investing substantial assets might not guarantee your family's financial security for life. Not all assets are liquid, capable of generating income. It may not be practical to convert your home, autos, and other possessions into income-generating assets.
Life insurance is one of the most effective tools for replacing lost income, as it can deliver a designated amount of money to your beneficiary, generally income-tax-free, at the very time it is needed most.
To determine how much is enough, you first need to determine your net worth. Here is a simplified rule-of-thumb way to calculate how much you are worth as a "money machine" to your family: simply multiply your present annual income by the number of years until you plan to retire.
For example, if you are 38 years old, plan to retire at 65 and have a current annual income of $45,000, your value is $1,215,000 ($45,000 x 27 years to retirement). This is your minimum financial value, based on the assumption that you live and remain healthy. It does not factor in (1) inflation or (2) real dollar increases in your income over time. So, your actual value is probably a great deal higher! Still, this amount does give you some idea just how much you are worth to your family.
When estimating a ballpark figure of coverage needs, there are other facts to consider:
- When factoring in existing coverage, be careful about including employer-sponsored insurance when calculating your needs. It may end with your employment if you change jobs, leaving you underinsured.
- Be wary of counting term life insurance when adding up your total coverage. Term insurance provides protection for a limited number of years. However, in some cases, it may expire and not be available when needed.
- If you have a child with special needs or a disabled spouse, you may need life insurance to provide lifelong income, not just for a limited number of years.
- If you have excessive debts or higher education bills on the horizon, you may need more coverage than the formula indicates.
- Taxes, appreciation, and inflation.
- If there are other sources of income available, your needs may need lower.
Disability Income Insurance
When protecting your income-earning potential, make sure to think about disability. What would happen to your family if you become disabled and were unable to work? The risk of disability - as well as the potential cost - is simply too great to ignore. (Products available through one or more carriers not affiliated with New York Life; dependent on carrier authorization and product availability in your state or locality.)
If you become disabled, here are five possible ways to manage financially:
- Tap into savings. But how long will the funds last? You could use up in a few short months assets that took years to accumulate.
- Borrow. But who will lend you the money? Even family and friends can only help so much. This is a short-term and potentially short-sighted solution.
- Sell assets. But if you have the assets to sell, what price will you get for them? Will you sell your home? Your cars?
- Count on Social Security. But will your claim be approved and, if so, how much will you receive?
- Transfer the risk to an insurance company. We recommend option #5. It's cheaper, safer, and smarter in the long run.
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