With the way home prices have skyrocketed in the last decade, I’d venture to think that many Americans feel that their most valuable asset is their home. On paper, those people might be correct.
Others may be in a situation where their retirement or investment accounts have increased beyond the dollar value of their home. On paper, those folks could be right as well.
But, if you are still working, I’d argue that you have an asset that’s far more valuable than any home, bank account, or investment account:
Your most valuable asset is your ability to earn an income.
If you’re familiar with Dave Ramsey, you’ve heard this phrase before. I don’t always agree with Dave, but he’s spot-on with this concept.
Think about it: if you’re 40 years old, earn $100,000 per year, and you plan on working until age 65, your ability to earn an income is currently worth around $2,500,000 pre-tax (even if we assume you never get a raise).
So, what happens if your ability to earn an income goes away? Let's look at two scenarios:
- Disability
Disability is the most common reason that people lose their income. We have to remember that disability isn't always injury-related, and that many people become disabled due to illness. Imagine the consequences for you and your family if you become injured or sick without a sufficient level of protection in place...
My mom was disabled, so I know all about the agonizing process of filing for government disability benefits, getting rejected over and over again, and then (if you're lucky enough to get approved) having to continue to prove your status as disabled. Trust me, it's not a fun experience.
But hey, it's ok, you have that disability policy included in your benefit package at work, right? Please make sure you understand the fine print on that policy. Your benefit term may be limited, your payouts may be limited, and it may only cover complete and total disability. Your policy may not cover "own occupation." But wait, what does that mean?
Let's say that you're an attorney and you earn $150,000 per year. Something terrible happens, and you're left with a brain injury that limits your cognitive ability. You're going to live a fairly normal life, but you definitely can't be an attorney any longer. But, the medical team has determined that you are able to work a job in retail. Could you go from $150,000/year to $15/hour? Does your disability policy cover that?
2. Loss of life
The emotional pain of losing a family member is bad enough, but the financial consequences can make the pain even worse.
Let's look at a very typical example of a suburban middle-class family:
- Two working spouses, Spouse A (40 years old) makes $80,000 and Spouse B (38 years old) makes $60,000
- $200,000 owed on the mortgage and $20,000 owed on a home equity line of credit
- $15,000 owed on one car loan and $5,000 owed on the second car loan
- Student loans are paid off
- Spouse A has $100,000 in a retirement account at work, and Spouse B has $100,000 in a retirement account at work
- Joint savings account has $25,000
- Two children, ages 12 and 10, both are very active in sports, dance and cheerleading
- Both spouses have life insurance through work that will pay the equivalent of their salary
What happens if Spouse B (the $60,000 earner) passes away?
In addition to losing a spouse and a parent, this family is going to be left in a dire financial situation. The $60,000 life insurance policy will cover the home equity line, both car loans, a funeral, and final expenses. That's it.
The surviving spouse now has to make some really hard decisions. What does he/she do with the house? Is the mortgage affordable? What about child care? Can the kids continue to play travel baseball and go to national cheer competitions?
These are all decisions we hope we never have to make in life. But, in the unfortunate event that we do, it helps to ease the pain if we are prepared.
The best way to protect your family is by discussing your situation with a financial professional that can help you to navigate your risks and give you advice on how to prepare yourself.
If you'd like to discuss any of these topics further with me, you can schedule your no-cost, no-obligation call here