The summer months are approaching! Many of us will get our sun protection on with suntan lotions, sunglasses whether prescription or plano. And we cannot forget our baseball caps/visors for the beach and for those outdoor pool parties and barbeques. In my last article I discussed taxes and budgeting, and this time I will tackle how we can protect ourselves not just for the summer months but year round!
As we try our best to get our beach bods into shape and be physically fit, us optometrists need to also be financially fit! In order for us to reach our goals, whether it be practice ownership, a house, a vacation home, maybe a Disney cruise every year or just a comfortable retirement. We need to build a solid foundation.
The most valuable asset that we all have is time. Time to spend with our loved ones or our patients or on vacation. But at some point in our lives, something unexpected will happen. I want you to pretend you all have the ability to build your dream three story home from scratch. Typically, to build a home, the architect and future homeowner will have to come up with a blueprint with the designs and plumbing/electricity before the house is built.
The same rules apply to our finances. We need to create a blueprint for success. I want you to think of each floor of that house you are building as different accounts. The first floor is the emergency account. The second floor is the short-term account. The third floor is the wealth building account. The roof protects everything we built from water damage and storms and that is legal services (wills, trusts etc etc).
Today we are focusing on the first floor. Whenever an unexpected emergency happens, people typically find themselves going into credit card debt or pulling from their retirement and their lives are going backwards instead of propelling them forward. If we do not have an emergency fund in place or insurance to protect us, we are essentially sitting ducks. It is ironic that it is almost mandatory for each of us to have auto and home insurance, as well as malpractice insurance, however it is 100% guaranteed that we will die at some point in our lives. And we only think about whether we have coverage for it or not.
Our jobs are to transfer our risk as much as possible because insurance is defense and investments are offense. At least one of these tragedies will happen in our lifetime and the insurances to help protect us include: malpractice insurance, disability insurance, long-term care insurance and of course life insurance.
Since sadly we will die at some point in our lifetime, as opposed to us ever being sued or becoming disabled. I will discuss life insurance since there are a lot of misconceptions and also misrepresentations out there. Since the belief agents tell us that “we need permanent insurance”.
Like I stated before, time is our biggest asset. But not only is time important, but so are our very own lives. Our ability to make an income is what we need to protect, and that is why life insurance can also be considered income protection.
There are many types of life insurances out there all disguised as one. You can call it whole life, cash value, index universal life, variable life, infinite banking etc, etc. Sadly, with these policies you are over funding the insurance policy and are often high costs attached to them. They are also very poor investment strategies. One should never mix insurance and investments together.
A lot of times, agents will say they have tax incentives or advantages to them. This primarily applies to the tax-free death benefit. Growth in your “cash value” account will be taxed if withdrawn, and the “tax-free” aspect often comes from withdrawing your own premium payment and taking debt on the policy. With fixed products, you may only get a poor 3-4% on your money, which is equivalent to the historical inflation rate. So, in essence, you break even on your money. However, the insurance company just made out like a bandit on you.
When you do plan on purchasing life insurance, term insurance is the way to go since we need it only for a temporary period and not for our entire lives. As we get older and nearing retirement, our need for life insurance decreases overtime. Our loans and homes will have been paid off and our kids are adults now etc, etc. With permanent life insurance, the agents tell us we need it forever. And not only that, but that we should have more insurance the older we get, which is costing people (us) a fortune.
The other misconception is life insurance given through work. When you have a policy that is given at work the golden rule is to take whatever is free. Then you want to purchase term insurance independently elsewhere. Because you will continue to have that policy if you decide to change jobs, or God forbid, they let you go or do not renew your contract. Also, the policies given at work are very low coverages for the death benefit.
Pro Tip:
- Never buy any kind of “cash value” or whole life insurance including universal life
- Never buy life insurance as an investment
- Never buy life insurance that pays dividends
Always remember a smart game plan or a well created blueprint will leave a legacy for your family members and loved ones if everything goes wrong. Stay tuned on my next article for the next level of the house since, Rome wasn’t built in a day!
