Insuring Against the Unexpected
Risk management is a vital element of any financial plan. There are events and occurrences in life that we simply cannot predict. However, we can help to guard ourselves against financial devastation in the face of these unfortunate changes with different types of insurance tools.
- Life Insurance: Traditionally, life insurance policies are purchased with the intention of financially aiding the surviving widow or widower after the unfortunate loss of a spouse. These policies pay death benefits to surviving spouses or beneficiaries upon the owner’s passing in exchange for premiums paid during the owner’s lifetime. There are two basic types of life insurance policies: term life insurance and permanent. Term life insurance policies expire after a certain term, or number of years, whereas permanent, whole life insurance policies provide lifetime coverage.
Life Insurance policies can provide many benefits. For women who are the primary breadwinner of the family, life insurance policies can provide financial security for the family in her absence. The hybrid policies with cash allocations allow the owner to borrow against the cash value of the benefit, which could help a woman pay off debt, start a new business, or finance her children’s education. And policies which combine life insurance with long-term care riders can provide financial resources should the owner become terminally ill. The type of policy you choose, though, should not be a decision made in isolation, but in the perspective of your overall financial circumstances and available resources.
- Long-term Care Insurance: According to the most recent data presented by the US government, at least 70% of Americans over the age of 65 will need some form of long-term care in their lifetime. Long-term care needs range from periodic in-home help with daily activities to full-time nursing home living. However, planning to pay for the high costs of assisted living or in-home aids is often overlooked.
Since women statistically live longer than men, it is especially important for them to plan for long-term care needs since their probability of living alone later in life is drastically higher. Women may not have a spouse to rely on to help with daily tasks, and as a result, may require more assistance for longer periods of time. Long-term care insurance or hybrid life insurance policies can be purchased to help ease the financial burden that long-term care could have on you and your family in the future.
Facing Financial Hardships such as Widowhood or Divorce
Many women are happy with their backseat role in financial planning while they are married, with 56% of married women still leaving investment decisions up to their husbands, but are unpleasantly surprised when they suddenly have a range of financial responsibilities to take over as a widow or divorcee.
In fact, according to a survey published by UBS on International Women’s Day in March of 2019, 59% of widows and divorcees wish they had been more involved in their long-term financial decisions and 53% would have done fewer chores to find more time for finances if they had known what type of hardships they would encounter once the finances were solely their responsibility. 98% percent of these surveyed women urge other women to become more involved early on to avoid making the same mistakes.
1) Evaluate Your Assets and Liabilities
Whether you are married or single, divorced or widowed, the first step to gaining control over your finances is to have a complete understanding of both your assets and liabilities. This knowledge allows you to calculate your net worth and craft a working budget to help prevent future financial hardship. In the case of a divorce, this can be especially critical since you’ll be dividing those assets and liabilities with your ex-spouse in the divorce settlement.
Assets: Knowing what your assets are and where to locate them not only helps you protect them, but also allows you to budget for your future.
However, when we look at this balance between assets and liabilities, our awareness should be honed in on the latter. Unknown liabilities can pose a far greater threat to your future financial security.
Liabilities: Liabilities are anything you owe money on, aka debt. Adding up your total liabilities and subtracting them from your assets allows you to calculate your net worth and plan ahead. Liabilities most commonly include:
- Mortgages, or home loans
- Student loans
- Consumer debt, such as credit cards
- Car loans
- Personal loans
Liabilities can illuminate a great deal about where your money is going on a monthly basis since outstanding debt payments can quickly erode a monthly salary, no matter how high. A woman who isn’t abreast of the finances may falsely believe that her family is doing well financially since both she and her spouse earn hefty salaries. Later, however, she is shocked to learn that much of her family’s income is already tied up trying to outpace their ever-growing debts.
Unfortunately, many women who do not share financial transparency with their spouses during their marriage stand to (a) enter widowhood with the realization they are less financially secure than they imagined or (b) lose out on an equitable division of assets during their divorce. It is not uncommon for a soon-to-be-ex-spouse to hide assets from the unknowledgeable spouse pre-divorce.
But at the very least, these widows and divorcees alike will be charged with learning the ins and outs of their new financial responsibilities amidst the emotional turbulence of these life transitions. This is quite an additional burden to carry, difficult circumstances notwithstanding.
Becoming knowledgeable about how your assets and liabilities measure up will give you a good idea of how much you can anticipate relying on them to cover expenses over both the short and long term. You may find that you and your spouse could benefit from a plan to pay down debt, or that you could even accelerate your retirement savings with higher contributions.
Ultimately, though, a thorough understanding of your financial picture will arm you with the information you need to maintain good financial health should you suffer the loss of a spouse and find yourself handling your own finances.
2) Estimate Your Income and Expenses:
One of the biggest surprises women encounter when they take over their finances is how much it costs to maintain their lifestyle. If you haven’t ever looked at your spending, you may have no idea what your family pays for major things such as homeowner’s insurance and property taxes, or even minor things such as lawn maintenance or a set of new car tires. The expenditures add up quickly.
Make a list of your current income and expenses and then evaluate how they may change should you end up on your own.
- Income: By how much will your monthly and annual income change? For retirees, you’ll need to research if and how your spouse’s pension or retirement plan benefits will apply to you after his passing.
- Housing: Will you be able to stay in your current home? Or will it make more sense to downsize?
- Benefits: Will you lose benefits such as health insurance, disability insurance, or life insurance that you currently receive through your spouse? What will it cost you to get new coverage?
- Social Security: How will a divorce or the death of your spouse affect your social security benefit? Will you qualify to receive his benefits? If so, how much can you anticipate receiving?
- Taxes: Many individuals, especially retirees, experience an increase in income tax once they go from “married filing jointly” to a single-filer. How will you offset this increase? If divorcing with dependent children, will you be the parent claiming the head of household deduction?
- Retirement: Will you need to increase your personal retirement savings to be able to make up for the loss of your spouse’s anticipated retirement income? How will your estimated retirement expenses and/or savings timeline change?
If you found yourself alone tomorrow, do you know what you would do to ensure your financial security? Taking an active role in the family’s finances can prepare you for that possibility.
If you’re a woman who has avoided financial planning, or if you transferred the job over to your spouse years ago, it’s never too late to get involved.
The financial advisors at Harbor West specialize in helping women who seek to take charge of their finances or are facing life-altering transitions such as widowhood or divorce. We understand that it isn’t just your money that is at stake, but the well-being of your family. Contact Us today to discuss how our advisors and transition experts can help you plan for a financially secure future.