How to prepare for losing employer-provided insurance in my emergency savings?

Question

I have an emergency fund that covers the next N months of life's expenses: rent, utilities, food, etc. But I recently realized I haven't accounted for insurance that is currently provided by my employer.

Through work I have dental, medical, vision, life, long-term disability, and accidental death and dismemberment insurances. If my employment ends (either voluntarily or not), I'll lose my insurances.

The most naive approach to preparing for this is to compute the cost of these insurances (mostly the monthly premiums) for N months and including that in my emergency fund. But I don't think that's practical for all insurances (e.g., life insurance).

My current plan is to:

• Include the monthly costs of medical, dental, and vision insurances in my emergency savings. My understanding of COBRA is that these must be made available to me after employment ends, so as long as I can pay the full costs, my coverage can continue post-employment.
• Buy my own (term) life, long-term disability, and accidental death and dismemberment insurances. These are fairly low-cost (ideally < $1,000/year for all) and ensure my family has a safe guard always in place should anything happen to me (the primary provider).

My question: Is this a reasonable approach to take, and are there other strategies for planning for insurance coverage in an emergency fund that I should consider?

Answer 1

Your approach is very reasonable. When recommendations are given for emergency funds they are meant to include (typically 3-6 months of) whatever expenses you will have in the case of emergency. If that's an expense you think is possible or likely, then you should include it. With rising health insurance costs, this is becoming a more and more important cost to consider. You may be shocked at how much the COBRA premium (plus the 2% allowable for admin fees) would be. Also note COBRA coverage typically lasts up to 18 months unless disability or coverage for a former spouse. After that point you would need to purchase separate insurance if you don't get it through a new employer.

Also, obviously, the 3-6 month emergency fund recommendation that is common is only a guideline. You may be able to run toward the lower end of that if you are in a career that is in high demand (you often get headhunters calling) or if you would have difficulty getting a new job then perhaps you need to have more than 6 months. It also depends on what other resources you may be able to draw from such as an open line of credit, other liquid assets, other less liquid assets, or even family support. Of course it's not ideal to plan on any family support, but it's reasonable to consider the possible outcomes if you have little or none available to you.