3 Affordable Financial Safeguards to Protect Your Health and Income

And Megan left a voicemail saying, “My jobs are all pretty physical, and I’m concerned that if I get injured, I won’t have enough insurance to cover my everyday expenses. I’ve heard you talk about disability insurance and would like more information on how to get it. What’s the best way to shop for and purchase disability insurance?”

Thanks for these crucial questions, Jordan and Megan! If you, or the breadwinner in your family, lose your job or business income, or you get sick all of a sudden, what would you do? For many people who don’t have financial protections in place, these scenarios are their worst nightmares.

Statistics about getting ill or suffering a serious injury during your career are pretty sobering. According to the Council for Disability Awareness, more than one in four of today’s 20-year-olds can expect to be out of work for at least a year because of a disabling condition before they reach the normal retirement age.

And when a disability occurs, the average time spent away from work is close to two years. Yet, most people don’t have a back-up plan for how they would pay everyday bills, such as housing, utilities, and food. Many Americans don’t even have health insurance to pay a portion of their medical bills.

While you might think that protecting your health and income is a luxury, it isn’t. These safeguards should be pillars of your financial plan. Let’s have a look at three financial protections that can be surprisingly affordable for both employees and entrepreneurs.

1. Savings

If you follow the Money Girl blog or podcast, you’ve heard me talk about building a cash reserve, which is known as an emergency fund. Having savings is one of the best ways to protect yourself from unexpected expenses or a sudden drop in earnings.

The trick is to save diligently when times are good. If you get a raise at work or have a profitable year in your business, it can be awfully tempting to spend the excess. But before you buy a luxury item or book a vacation, make sure you have plenty in the bank. I know saving isn’t as much fun. But the best way to make sure you’re ready when bad luck strikes, is to prepare for it today.

Think about your emergency savings as a special bucket of money that should be kept completely safe in an FDIC-insured savings account. You can open one at the same place as your checking account or use a different institution. Consider a high-yield savings that pays more interest than a typical account.

Free Resource: Use the free Online Bank Comparison Chart (PDF) to compare some of the best places to park your emergency money.

Don’t make the mistake of investing your emergency money. The purpose of emergency savings isn’t to make money or even keep up with inflation, but to save you from a financial hardship. If you invested it, the value could drop significantly the moment you desperately need it.

Build up your savings to a minimum of three months’ worth of living expenses. For example, if you spend $3,000 a month on your rent, utilities, food, transportation, debt, and other expenses you can’t live without, aim to have at least $9,000 in your cash reserve. But depending on your family and work situation, you might prefer to have more or less.

If you haven’t started saving for an emergency fund, don’t get upset about it, just get started. Make a goal to accumulate $100, then $500, and $1,000 as quickly as you can. Yes, this might require you to make some sacrifices to reduce spending or to find a way to earn more money.

A tip that helps me is putting my savings goals on autopilot. That’s a smart way to stay on track and never get tempted to spend the money. It may take a little juggling with your expenses, but eventually, you won’t even miss the money.

Once you have a safety net in place, you’ll have an amazing sense of security and peace of mind that no matter what happens with your health or income, you have options.

2. Health insurance

While having emergency savings is critical, it probably wouldn’t be enough to pay for ongoing medical care in the event of a severe injury or illness. Even a quick trip to the emergency room could set you back thousands of dollars. Not only that, but a survey of ER patients by the New England Health Institute found that 56% of all ER visits were avoidable. That’s why health insurance exists.

Starting in 2019, the “shared responsibility payment,” which is the fee for not having health insurance, no longer applies. Technically, it’s still illegal to be uninsured, but the federal government won’t penalize you for it. However, some states have their own insurance mandate, requiring you to have a qualifying health plan or pay a fee with your state taxes..

If your employer offers coverage through a group health plan, that’s usually the most affordable option. But what if you’re like Jennifer’s husband who’s about to become self-employed?

COBRA continuation coverage

Jennifer, there’s no denying that individual health coverage is more expensive than a group plan. In How to Manage Health Benefits When You Leave a Job, I cover your rights and options for getting the most out of your health benefits from an old job. One of them is using COBRA continuation coverage.

COBRA is a law that gives you the option to continue your employer-sponsored health insurance after you’re no longer employed. So, instead of having your plan canceled the month you leave a job, you can use COBRA to continue getting the exact same benefits and choices that you had before you left your company.

COBRA protects everyone affected by the loss of group health insurance, including the former employee, his or her spouse, former spouses, and dependent children – when certain events occur.

In most cases, you can use COBRA to continue your group health coverage for up to 18 months. It also applies to any dental and vision insurance you have through an employer.

As I previously mentioned, it must be identical to the coverage you were offered at your company before you left. You or your family are entitled to have the same coverage limits, co-payments, and deductibles.

After you leave an employer, you should receive information about your rights to apply for COBRA. You must notify your human resources department within 30 days after a qualifying event (such as a termination or cut in work hours) that you want to elect COBRA continuation.

I recommend shopping and comparing the cost of COBRA to a private policy. Typically, your COBRA cost will be higher compared to what you previously paid as an employee because your employer isn’t subsidizing it.

Depending on your household income and the number of people in your family, you may qualify for assistance that reduces your monthly premiums for a private policy. That could make the cost of a marketplace plan much less expensive than COBRA.

But if you have high income and don’t qualify for reduced premiums, COBRA may cost about the same or even give you better benefits for the price. There are several ways you can shop for coverage:

• • Healthcare.gov, which is the federal healthcare marketplace
  • Insurance aggregator sites, such as Bankrate.com and eHealth.com
  • Through an insurance broker

• Your state’s online healthcare marketplace

There are 13 states with their own health exchanges: California, Colorado, Connecticut, District of Columbia, Idaho, Maryland, Massachusetts, Minnesota, Nevada, New York, Rhode Island, Vermont, and Washington.

The best type of coverage for you and your family depends on what you can afford, whether you need frequent visits to a specialist, and if the doctors you prefer are covered. Here are some types of health plans that may be available and the benefits they provide.

HMO (Health Maintenance Organization) plan

An HMO is a network of doctors, service providers, and hospitals you can choose from for health care. You select a primary care physician (PCP) who must refer you to a specialist when needed, such as a dermatologist or an allergist.

If you get treatment outside of an HMO network, it may not be covered. However, there are exceptions, such as being transferred to an out-of-network hospital in an emergency.

With an HMO, you pay monthly premiums, and benefits begin once you meet an annual deductible. You’re responsible for coinsurance, which is a percentage of health care costs. You also have fixed copays for visits to a doctor’s office and prescription drugs.

Because an HMO gives you less freedom of choice than other plans, they typically cost less. So, it’s a good option when you want to maintain low healthcare costs, and you’re in relatively good health.

PPO (Preferred Provider Organization) plan

A PPO is similar to an HMO in that you choose health care providers from a recommended network. However, you’re allowed to get care outside your network, and you don’t have to select a primary care physician or get a referral to see a specialist.

While a PPO gives you more freedom to seek the care you want, it’s typically a more expensive plan compared to other options. If you go out of a PPO network, you usually get less coverage and therefore have higher out-of-pocket costs. Like an HMO, you also pay monthly premiums, a deductible, copays, and coinsurance.

A PPO is a good option when you can afford higher premiums and healthcare costs. But it gives you the most flexibility when you travel frequently or prefer to see out-of-network doctors.

Catastrophic health plan

A catastrophic plan is designed to provide benefits only when you suffer a major medical event, such as a car accident, heart attack, or cancer. It protects your finances if you’re diagnosed with a serious illness or need emergency treatment.

These plans give limited coverage, come with a high deductible, and are typically only offered to those under age 30. They may require policyholders to use in-network providers and may not cover prescription drugs.

Since catastrophic plans offer the least benefits compared to other health plans, they should be used as a last resort when you need the lowest premium possible.

HDHP (High-Deductible Health Plan)

An HDHP can be any health plan, such as an HMO or PPO, but it has a higher-than-normal deductible and lower monthly premiums. Plus, many HDHPs qualify policyholders to use an HSA, or health savings account.

With an HSA, you make pre-tax contributions up to an annual limit, which you can spend on a variety of qualified health care, including medical, dental, hearing, and vision expenses. It gives you several tax advantages:

• Contributions are never taxed
• Interest or investment earnings are never taxed
• Withdrawals to pay qualified medical expenses are never taxed
• Balances roll over from year to year with no spending deadline

If you’re under age 65 and spend HSA funds on non-qualified expenses, you’ll be subject to income tax plus an additional 20% penalty on withdrawn amounts. However, withdrawals after age 65 can be used for non-medical expenses without penalty (but income taxes would apply).

An HDHP can be a good option if you want lower premiums, you’re in relatively good health, and you’re likely to take advantage of an HSA.

If you’re managing a chronic illness or take expensive prescription drugs, you need a more comprehensive plan, such as a PPO. But if you’re on a budget and in relatively good health, you may come out ahead choosing an HMO or an HDHP.

But what’s important to remember is that even when you have health insurance, you still have to pay a deductible, co-payments, and co-insurance out-of-pocket. A health plan rarely covers 100% of your medical costs. It’s a safety net that helps limit your total potential medical debt.

For 2020, a high-deductible health plan can require you to fork over a maximum of $6,900 as an individual, or $13,800 as a family, every calendar year. These annual limits don’t even apply to services you might receive outside of your plan’s network of doctors.

Having savings in the bank or a tax-advantaged health savings account (HSA) is how you’ll pay medical bills until you meet your annual deductible or that your insurance doesn’t cover.

3. Disability insurance

Once you have savings and health insurance, there’s still a significant risk you face: Not being able to earn an income while you recover from an accident or illness. Health insurance only pays a portion of your medical bills, not your everyday living expenses.

Megan is very wise to consider the fact that she’s vulnerable if she gets injured. But the reality is that you don’t need a “physical” job to be at risk. Anyone could be injured in a car accident or come down with a serious illness that leaves you unable to work. Yup, there’s insurance for that, too!

You may have the option to enroll in a short- or long-term disability policy through work. It’s typically more affordable than a private policy and comes with less underwriting requirements, such as not having to undergo a physical exam. But it may not give you enough coverage, depending on your income and family situation.

No matter if you’re underinsured at work or are self-employed, you can purchase a disability policy on your own. The cost depends on various factors such as the amount of replacement income (such as 50% or 70%), the waiting period for when benefits begin, your age, and your health status. But if you’re relatively young and in good health, a good disability policy might cost in the range of $25 to $50 per month.

There are several ways you can shop for disability coverage:

• Disability insurers, such as MetLife, State Farm, and Northwestern Mutual
• Insurance aggregator sites, such as Policygenius.com and Bankrate.com
• Through an insurance broker

If you think that you don’t need private disability insurance because the government offers Social Security Disability Insurance (SSDI), make sure you understand it. Yes, it’s true that if you qualify for SSDI, you can receive it until you reach retirement age and then switch to Social Security retirement benefits.

However, there are very strict requirements for SSDI. According to the Social Security Administration, to qualify, you must:

• Be unable to work because you have a medical condition that is expected to last at least one year or result in death
• Not have a partial or short-term disability
• Meet the SSA’s definition of a disability

To see the listing of impairments that can qualify for disability, see the Adult Listing of Impairments page at SSA.gov.

The types of health and disability insurance policies that are best for you depend on your finances, health care needs, and family situation. Compare several options and always speak with a licensed insurance professional when you need help.