4 ways to protect your financial freedom

By Liz Pulliam Weston

You've made the decision to abandon the corporate world and are about to pull the trigger on your plans for financial freedom -- or maybe you're still in the dreaming stage. Either way, you're putting your finances in order, drawing up spending plans and realigning investments for your post-9-to-5 life.

Sounds idyllic, but all of your plans for financial freedom could be scuttled if you don't guard against catastrophe. Get in a serious car accident, contract a disabling illness or fall off a ladder while cleaning your gutters, and you could find yourself wiped out.

To protect yourself and your dreams for the future, here are four types of insurance you should at least consider. Two of these -- health and umbrella liability insurance -- are pretty much no-brainers for most people. The other two are important but tend to be expensive. Here's what you need to know.

Health insurance: Consider catastrophic coverage

Even if you're young and healthy, health coverage is a must-have. One accident or illness could wipe out everything you have or land you in bankruptcy court. If your employer doesn't offer health insurance, or if you're self-employed, catastrophic insurance is one way to protect yourself.

You also should consider it if you're about to retire early. Few companies offer retiree health benefits anymore, and Medicare doesn't start picking up your medical bills until you're 65.

Catastrophic coverage has high deductibles and low monthly premiums. Most policies make you pay for the first $1,000 to $5,000 in medical bills, but then cover everything over that up to a limit, typically $1 million to $3 million. Instead of costing $300 to $500 a month for two people in their 30s -- the typical cost for traditional, lower-deductible plans -- catastrophic policies cost closer to $100 to $200 a month.

The costs increase the older you are, but catastrophic coverage will still be less expensive than the alternatives. A couple aged 55 could pay more than $1,200 a month for a traditional medical plan, while a high-deductible plan will cost about $500.

As with most insurance, it pays to shop around. Contact several companies for quotes, or use an independent insurance agent who can help you comparison shop.

Umbrella liability insurance: Peace of mind

This type of insurance protects you if you are sued or cause damage to someone else. Your homeowners and auto policies have liability insurance built into them, but the coverage may not be sufficient.

The typical auto policy, for example, has a maximum liability limit of $300,000 per accident, although your limit could be as low as $15,000 if you bought a bare-bones policy. If you cause an accident that results in $1 million of medical bills for someone else, you could be sued for the difference.

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That's why insurance experts recommend that you have liability insurance equal to at least twice your net worth, if you're highly paid or seen as a possible lawsuit target (if you're a doctor, a lawyer or any kind of public figure).

Most auto and homeowners policies have an upper limit of coverage of $500,000, so if you need more coverage, you'll probably need to buy a personal liability policy. This so-called umbrella policy extends over your existing coverage like an umbrella, kicking in after your auto or homeowners coverage is exhausted.

Umbrella policies are one of the best-kept secrets in the insurance world. They're relatively inexpensive, so insurance agents don't make much of a commission selling them. But for $150 to $300 a year, depending on where you live, you can get $1 million of coverage -- and peace of mind.

Disability insurance: Replace your income

You may think your biggest asset is your house or your 401k, but actually it's your ability to earn money. And chances are, you don't have enough protection should you become unable to work for more than a few weeks.

Your state's workers' compensation fund, for example, usually provides benefits only if you get hurt on the job. Your employer probably provides some kind of short-term disability coverage, but the checks will end after three months to a year. If you can't work for longer than that, Social Security may provide some benefits -- but only if you're so disabled that you can't hold any job.

So unless you don't mind switching from your current career to one flipping burgers or telemarketing, you probably want to have a long-term disability policy.

Unfortunately, if your employer doesn't offer it, you may find that a long-term disability policy is expensive or tough to get, said Raymond Parry, an account executive with James P. Bennett & Co. in Santa Monica, Calif. A 35-year-old white-collar worker needing a $5,000 monthly benefit would pay at least $2,500 a year for an individual policy, and that's assuming she's in perfect health, Parry said. Some people who try to get policies on their own, Parry said, find they don't meet the disability companies' strict underwriting criteria.

Continued: Long-term care insurance

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