With the recent surge in COVID-19 cases, many states are reconsidering shutdowns and safer-at-home restrictions. As many small businesses and large companies prepare for that possibility, it’s important for people to be prepared for an unexpected job loss.
“Whether it’s an upended economy, a sudden health issue or decisions by management, you can’t always predict what could impact your income,” said Ryan Chang, Northwestern Mutual Financial Advisor based in Los Angeles. “No matter the reason, it’s better to be ready than stress about what to do after the fact.”
Here are four moves from Ryan Chang that can help you get prepared financially for a sudden loss of income.
BEEF UP YOUR EMERGENCY FUND
Although the federal government and states have offered assistance and relief programs like unemployment benefits and stimulus checks, chances are these would not be enough to cover all of your expenses. That’s where your emergency fund comes in.
“Generally, a good rule of thumb is to keep six months of household expenses in an emergency fund,” said Chang. “However, keep in mind that without a job, you may have to cover additional costs such as paying for health insurance on your own.”
Also, consider that depending on where the economy goes, it may take you longer to find a new job. Plus, the higher your income and the more experience you have, the longer it could take. That may be a reason to pad your emergency fund even further — perhaps anywhere from nine to 12 months of expenses.
Take the time now to see how much is in your emergency fund and consider reducing or eliminating some unnecessary expenses until your cash cushion is in a good place. Maybe the money you’re saving while quarantining can be funneled to your emergency fund, or perhaps there are some quick costs you can cut from your budget that you won’t feel too much. Living a little more conservatively for a while now can help you avoid having to make drastic lifestyle changes should a job loss or other emergency eventually occur.
MAKE SURE YOU’RE ADEQUATELY INSURED
If you receive life insurance or disability insurance through your employer, you may lose that coverage if you lose your job. Find out if any policies you have through your company are portable, meaning you’d be able to convert any group policies through work into personal policies if you left the company.
It’s also a good idea to assess now whether any personal coverage you have is adequate: Between what your company offers and personal coverage, do you have enough disability insurance to cover a good chunk of your income if an injury or illness sidelines you for a while? Is your life insurance coverage adequate to protect your family should something happen to you?
“The earlier you can secure life insurance, the more affordable it will be, so it’s wise to get coverage sooner rather than later,” said Chang.
ASSESS ADDITIONAL OPTIONS FOR ACCESSING CASH
While your emergency fund should be the first source for cash in an emergency like a job loss, you may have other options if needed. These could include a line of credit, life insurance cash value or tapping into investments.
Each has pros and cons:
Line of Credit
Pros: Offers a new infusion of cash when you need it.
Cons: You’ll owe interest on the money you borrow. Qualifying for additional credit or a loan could be difficult if you are not employed. You may end up taking on more debt than you can handle.
Permanent Life Insurance
Pros: It’s quick and relatively easy to get your money, and repayment can be flexible.
Cons: You need to have owned your permanent life insurance policy for a number of years before accruing any significant cash value, and much of the growth will depend on dividends, which aren’t guaranteed. Borrowing money against the cash value can also reduce your death benefit by the amount you borrow if you don’t pay the money back before you pass away. If not managed properly, a loan against your life insurance could result in your policy being surrendered, which could trigger a tax liability.
Pros: You’re using money that you already have, meaning that you won’t need to go into debt or pay interest on the money you access.
Cons: You may owe taxes on the investments you sell, and you’ll lose the opportunity for growth on those investments. In particular, try to avoid tapping retirement accounts for cash
because you’re reducing the amount of savings you’ll have for retirement in the future. And while Congress recently relaxed rules around borrowing from your retirement account for COVID-19-related reasons, withdrawing from your retirement account early would typically result in hefty penalties.
TALK TO AN ADVISOR
In addition to building financial plans that are designed to help you achieve all your goals in life, financial advisors will typically also help you plan for things that could go wrong. Having a financial plan in place when you lose your job can go a long way to helping you feel more comfortable about how you’ll manage financially. Your advisor will also be able to help you make strategic choices about where to pull money from so that you stay in a strong financial position while you search for your next opportunity.
Loans taken against a life insurance policy can have adverse effects if not managed properly. Policy loans and automatic premium loans, including any accrued interest, must be repaid in cash or from policy values upon surrender, lapse or the death of the insured. Repayment of loans from policy values upon surrender or lapse can trigger a potentially significant tax liability and there may be little or no cash value remaining in the policy to pay the tax. The policy will lapse if loans become equal to the cash value while the policy is in force and additional cash payments are not made.
About Northwestern Mutual
Northwestern Mutual has been helping people and businesses achieve financial security for more than 160 years. Through a holistic planning approach, Northwestern Mutual combines the expertise of its financial professionals with a personalized digital experience and industry-leading products to help its clients plan for what’s most important. With $290.3 billion in total assets, $29.9 billion in revenues, and $1.9 trillion worth of life insurance protection in force, Northwestern Mutual delivers financial security to more than 4.6 million people with life, disability income and long-term care insurance, annuities, and brokerage and advisory services. The company manages more than $161 billion of investments owned by its clients and held or managed through its wealth management and investment services businesses. Northwestern Mutual ranks 111 on the 2019 FORTUNE 500 and is recognized by FORTUNE® as one of the “World’s Most Admired” life insurance companies in 2020. Northwestern Mutual also received the highest score among individual life insurance providers in the J.D. Power 2019 U.S. Life Insurance Satisfaction Study.
Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company (NM), Milwaukee, WI (life and disability insurance, annuities, and life insurance with long-term care benefits) and its subsidiaries. Subsidiaries include Northwestern Mutual Investment Services, LLC (NMIS) (securities), broker-dealer, registered investment adviser, member FINRA and SIPC; the Northwestern Mutual Wealth Management Company® (NMWMC) (fiduciary and fee-based financial planning services), federal savings bank; and Northwestern Long Term Care Insurance Company (NLTC) (long-term care insurance).