Tuesday, November 11, 2008

Self Insuring for Disability

I'm a pretty cautious person (one might even say risk averse), so I've thought a fair amount about how to provide for my family in case of accident or injury. While preparing firewood this year (as I do each year), I dropped a large log on my left hand. For about two weeks, I wasn't able to type with my left hand. It made me think a little bit harder about providing for my family in the case of disability.

Disability insurance is much too expensive. My goal is to have disability savings worth at least 6 months living expenses. I could save that money in a money market fund, but I know myself and that's too easy to spend. Wherever I put this savings should meet the following criteria. It must:
  1. be difficult to spend
  2. safe through inflation
  3. be easy to sell at any time
  4. predictably retain value
  5. have a low cost of ownership
CDs don't meet the second or third criteria. Stocks don't meet the fourth criteria over short time intervals. Corporate bonds don't seem to meet the second or fourth criteria. I'm morally opposed to Treasury securities. Gold and silver have a fair amount of market volatility, so they might not meet the fourth criteria in the short term either. Precious metals don't seem inclined to the dramatic price swings of stocks though, so they seem a little bit better for what I have in mind.

My current inclination is to use the savings to buy gold bullion from a reputable online dealer. If push comes to shove and I need the money to pay living expenses, I'd sell it piece meal on eBay. That's because the eBay price is routinely higher than the spot price.

So what do you think readers, is that a good way to go? Have I overlooked something important?


JJ Hendricks said...

I definitely like the idea of self-insuring for disability. A very good idea to cover those kinds of contingencies.

I'm not sure if gold is any better at your 4th criteria than stocks. Look at the 30 year gold price history. There are huge increases and huge declines in relatively short periods of time (1-2 years). I haven't found any volatility comparison between gold and stocks, but I think gold is probably just as volatile.

My guess is you won't find any one security that perfectly meets your criteria. You will have to decide which is the best. Gold might be it. My guess is corporate bond fund might also be a good option. I can't find long term data but this chart shows the DJ Corporate Bond Index over the last two years. It dropped 10% during the worst financial crisis in probably 30 years. There are ETF's for it to so it would be very liquid.

Just my two cents.

mndrix said...

Thanks for the price chart JJ. You're right that there does seem to be a fair amount of volatility in gold prices over the last 30 years. Interestingly, they were really stable for about 20 years during the 80s and 90s.

Thanks for the suggestion of an ETF for corporate bonds. That might be a good combination.

TanookiTravis said...

I know this probably isn't going to help you make your decision but I had to put in my two cents. And keep in mind, I could be very wrong.

But I agree with what JJ said that you won't find any one security that fits perfectly. To me, criteria 1 and 3 sort of go against each other. If you sell or spend something, you are ridding yourself of it in exchange for something else (whether that be a good, service, or money). So making something hard to spend but easy to sell seems near impossible.

Sorry I didn't really bring anything constructive to this, but I fear you may have a near impossible goal in mind.

mndrix said...

Thanks Travis. I think you're right. I'll probably have to decide which points are the most important to me and overlook the least important ones. As I've talked about this problem, I've realized that I also need to define terms better for myself. What do I really mean by "easy to sell" and "hard to spend"?

Back to the drawing board...