After reading an article called 11 Steps To Financial Freedom in the latest MoneySense magazine, I thought it would be interesting to go through each of these steps one-by-one and share my results on this blog. Each week I’ll go through one of the 11 steps to financial freedom, with the intention of creating a complete financial plan by the end of the series.
Over the past several weeks I have prioritized my goals, determined my net worth, recorded my cash flow, compared my spending to my goals, set my top three goals and developed a strategy to reach our goals. This week we take a look at step 7: review your insurance.
Review Your Insurance
According to the MoneySense article, most of your insurance may be provided by your employer’s group plan and with some basic calculations you can find out if you have enough coverage. The rule of thumb for life insurance is to get enough to pay off your debt, plus cover 10 times your income if you have kids under 10 years old, and five times your income if you have kids over 10.
Your workplace benefit plan should also include disability insurance, but if it doesn’t, get enough to replace at least 60% of your after-tax income.
Action Step #7: Review Your Coverage
There is no worksheet for this step, but I spent this week reviewing my group insurance plan to see if I needed to make any changes. In the last three years we had a child and started living on one income, and most recently we built a house and took on a larger mortgage. Our life insurance policy needs to be updated to reflect these changes.
My current group life insurance coverage is set at $250,000 and costs me $14.50 a month. There is optional life insurance that I can purchase in units of $10,000, up to a maximum of $500,000. Since I’m under 35, insurance coverage is still fairly cheap. At $0.58 per unit of coverage, topping up my policy to a total of $750,000 will only cost me an additional $29 a month.
This change won’t get us to the rule of thumb mentioned above, but I’m more concerned that our life insurance policy pays off our mortgage and covers 10-15 times our annual expenses, rather than income.
I also checked into my long term disability coverage. The policy states that it will provide 65% of the first $4,500, and 45% of the balance of your pre-disability monthly earnings up to a maximum of $6,000 per month for the length of time that you are totally disabled, or until your 65th birthday.
So this month it looks like I will be taking a trip to our group benefits office to update my life insurance policy by purchasing $500,000 in additional coverage. I’ll also make sure to review my insurance coverage every year or two in case we need to make any changes.
Next week we’ll attempt to slash our taxes with step 8: consider calling a tax accountant.