• The Role Insurance Plays In Achieving Financial Independence

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    The FIRE (Financial Independence, Retire Early) movement has gained more traction in recent years with many easily available resources offering information about the best ways to achieve financial independence. In previous generations, it was the social norm to start a job straight out of college or high school, stay one or two positions within the same field, and then retire at 65. 

    With changes in the current workplace, increased freelance and entrepreneurial opportunities, and new ways to earn money, individuals are finding creative ways to plan for retirement earlier than later in their careers. While staying diligent about saving money and investing are certainly major components in the FIRE movement, it is also important to consider the role insurance plays in achieving financial independence.

    Why is insurance needed to achieve financial independence?

    The sole purpose of insurance is to mitigate risk, protect your assets, and help manage loss in exchange for a monthly premium paid to an insurance carrier. Premiums are based on the type of insurance you are obtaining and the statistical risks posed to the carrier. While it may seem counterproductive to spend more money to achieve financial independence, there are certain costs that are necessary to protect your long-term financial stability. 

    When achieving financial independence you must question life events that could pose a risk or even threaten to cause major financial disaster—along with how to best protect yourself from these unforeseen events. Even though it is possible to mitigate personal risks for certain types of insurance such as always wearing a seatbelt and eating healthy, there are still situations that can occur that you cannot prevent despite how much you try to avoid potential dangers.

    While extremely wealthy individuals might not need certain types of insurance because they are able to pay for these expenses out of pocket, those who are trying to achieve financial independence should look into certain safeguards to protect themselves in the meantime. 

    What types of insurance do you need?

    To determine the type and amount of insurance you need, you must first question what would happen to your finances if something were to go wrong. For example, if you were forced to take time off from work because of an accident, would your spouse or partner be able to maintain payments on your monthly financial obligations? Furthermore, if your spouse were to pass away, would you have enough protection to cover your family’s monthly expenses? Simply put, if you are unable to continue making monthly payments after an unforeseen circumstance, you need insurance.

    Health insurance

    Depending on where you are in your financial journey, health insurance is important to obtain to protect your financial future. Having health insurance coverage protects you from large financial loss due to any unforeseen medical expenses. Unfortunately, lack of medical insurance has led to bankruptcy for many financially responsible individuals, which is why some type of coverage is recommended. 

    Depending on your coverage, your plan might also include additional benefits that cover all or most of the cost of preventative appointments. Even though health insurance is an added monthly cost, having this type of protection ensures that you won’t lose large sums of money on medical expenses, thwarting all of your efforts you have put into achieving financial independence.

    You could either look into the options offered through your employer or seek out private insurance, depending on the cost and what is available to you. If you are younger and healthier, it might be better to look into a catastrophic plan which covers much less than a traditional plan but is also cheaper. These types of plans work for those who rarely need to see the doctor and are only looking for coverage in the case of an unforeseen medical expense or an accident. 

    Life insurance

    Life insurance serves the sole purpose of replacing your income if you were to pass away. If you are on a journey to financial independence but have family that depends on your income, life insurance is an important safeguard to secure. When looking into life insurance, the two most popular options to choose between are whole life insurance and term life insurance. Whole life insurance never expires and has an added investment component to the policy. Because of this, whole life insurance policies are much more expensive to secure each month. 

    Term life insurance, however, expires after a given amount of time and does not have an investment built into the policy— which is why this type of coverage is less expensive each month. Term life insurance is a good option for those striving for financial freedom when you are working towards not needing coverage to protect your income and assets. Therefore you can secure a policy to cover you for a set number of years that you would need protection for, instead of paying for more coverage than needed. Additionally, term life insurance is beneficial because there will be a point when children are no longer dependent on your income so you might not need as much coverage at that point. 

    Homeowners insurance

    While most banks require homeowners’ insurance to obtain a mortgage, it is important to make sure that your belongings (which are also covered under the policy) have adequate coverage as well. Because you have flexibility when securing a policy to determine the amount of coverage needed for your belongings, remember to take time to account for the number of items you actually have in your residence. This will ensure that you wouldn’t be responsible for coming up with additional funds to replace your items in the event of a loss at your residence. 

    Remember to also look into the liability portion of your homeowners’ coverage to ensure that if an injury or accident were to occur on your property, you would not be subjected to financial loss. 

    While on your journey to financial independence, remember that some costs, such as various insurance policies, are necessary to protect your hard work. Although you might not always need to have an insurance policy once you become more financially independent, while you are on your journey to financial independence this could be a necessary cost. Keep continuing your hard work so that you can achieve your goal of retiring early.

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