No one can complete a financial plan without addressing the “W” questions.
What do I want? When? Who can help? Who is involved? Why this plan? What resources do I have?
There will be many what do I wants, and that involves different times and people. The resources tend to be more confined. I suppose someone could get a better job or start a business, but those may be part of the what questions.
One “W” that most people get wrong is “What if?”
Resources are usable only once. Once you spend a dollar it is gone. No plan can be completed without resources, so the question of availability comes with a need for scrutiny.
What if you get laid off or your field becomes less in demand or you get out of date.
During the tech bubble crash in 2000, many programmers, software architects and systems people lost their well paid jobs. Some found whatever they could at any price, sometimes free, because they could not keep up to date without work. In software development two years out of date is not dissimilar to useless. How do you suppose that affected their organized, saving and debt management plans?
Poorly I suspect, but there were few that had the eventuality built in to their future plan.
Similar outcomes occur when people become unable to work as the result of illness or injury. Disability insurance does not protect you from disability, it protects your money and lifestyle from the effects of disability. Young people often ignore this coverage because it seems expensive and it seems unlikely. Given that their ability to earn income is their only significant resource, that is shortsighted.
Life insurance is the same issue. If your life plan relies on financial resources and the only valuable ones you have are your ambition, skill, time and energy, then dying young will prove to be a poor career move.
The odds of dying are small and the odds of becoming disabled are somewhat greater so neither is likely. Suppose the odds of having either happen before age 45 were to be one in fifty. 98% probability that nothing will happen. 2% probability of a problem. The premiums for insurance on the other hand are 100% certain. Not a good relationship.
A cost for premium with only a tiny probability of collecting is not a good defense. You can afford it and not the improbable loss. Saving the premium is not planful.
Here’s why. You, particularly, cannot be 2% dead or 2% disabled. The odds only matter where there are many people. A particular person will be 100% alive or 100% dead at 45. If they are 100% alive, they may have paid for nothing. If they are 100% dead they will have completed the financial part of their life plan despite their bad luck. Think it through. Statistics are subtle. Meaning matters.
No plan is complete until the What Ifs attach to some plan B.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.