Learn what you need to do to prepare for unexpected expenses. Follow the entire series LifeStages series at money.usatoday.com.


Ken Campbell of Lubbock, Texas, knew something was wrong last year when experienced bouts of severe itching and his eyes began to turn yellow. His doctor suspected a blocked bile duct, but an ultrasound didn't show a gallstone.

The doctor initially recommended a stent to keep the duct open. "I've been around enough to know that probably wasn't a solution," says Campbell, a licensed surgical assistant. He called a specialist who gave him the news: In all likelihood, it was pancreatic cancer.

Campbell, 58, didn't hesitate: He called physicians he knew and even got one to come out of retirement to treat him. After a long period of chemotherapy and radiation, his scans have been clean.

Campbell was more prepared than most people, who don't know which surgeons to choose. But he took steps that helped nearly as much -- particularly, in handling the financial strain of a procedure that cost between $750,000 and $800,000.

You can't prepare for everything. But to prepare for the unexpected, you need two things: insurance and savings.

You need insurance to cover the things that savings never will, such as a major illness, an accident or a lawsuit. You need savings to cover the things that insurance doesn't.


The four types of insurance you need: property/casualty; life; medical; and disability.

-- Property/casualty. Protects you against things that go bump in the night -- and from other people suing you if you're the thing that went bump against them. You need property insurance to make sure your home and auto can be repaired or replaced. You need casualty insurance if you inadvertently cause harm to others -- say, by running your car into theirs.

You may also need an umbrella liability policy to protect your assets, says Mark Bass, a financial planner in Lubbock. Say you get into an auto accident, and have $50,000 in liability protection. But the person who was in the other car sues you for $1 million. The umbrella policy should pay whatever isn't covered by the auto policy.

-- Life. Benefits your loved ones if you die. The cheapest form is term life insurance. If you live, the company keeps your premium. If you expire before the policy does, the insurance company pays your heirs. Your premium will rise every year in a plain-vanilla term life policy, but you can get level-payment term for a higher initial premium.

You can also buy whole life policies, which have a cash value, but premiums are much more costly, and returns are often mediocre. If you're young and don't have a mortgage, a spouse or children, you can get along fine without life insurance, unless you're worried about burial costs.

If you have dependents, however, you'll need enough life insurance to cover your family's needs if you get called to the Choir Invisible. Bear in mind that you're attempting to replace your income over a certain period -- not make your survivors fabulously wealthy.

-- Medical. A serious illness could wipe out your life savings -- and more. About 29% of bankruptcies are directly attributable to health bills, according to FactCheck.org, and 62% of those surveyed in 2009 cited medical costs as a contributing factor.

Campbell was fortunate to be covered by his wife's insurance policy. He estimates his out-of-pocket share at about $2,500, but he still has ongoing costs, such as regular PET scans, which require a co-payment.

-- Disability. "Disability is an economic death," Bass says. It's the death of your income. And it's a condition that health insurance and Medicare won't cover. A basic disability policy will ensure that you can at least buy food and make other basic payments without having to sell everything you own.

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The typical rule of thumb: Have three to six months' worth of expenses in short-term, highly liquid accounts in case of emergency.

"I hate rules of thumb," says Ray Ferrara, a financial planner in Clearwater, Fla. "Obviously, if a person has no debt and (is) in good health and retired, he may not need that much in cash reserves. And a young person just starting out in life will be lucky to have two weeks' reserves."

Nevertheless, you should have access to enough money to pay bills for a period of unemployment or disability. (Most disability policies have a waiting period before they start paying benefits). The amount of money you need to keep depends on how confident you are that you'll be able to get a new job. A nurse or a network administrator, for example, may be able to get a new job much more quickly than a French teacher or a journalist.

If you own a home, you should consider opening a home-equity line of credit as a source of emergency funds. The line will allow you to borrow up to a certain amount against the paid-up portion of your home. You won't be able to get a home-equity line if you're unemployed, so do it while you have a job.

And be aware that sometimes, the unexpected is good -- which is why it's important to have an emergency fund. "If someone offers you a special vacation opportunity, or tickets to the World Series, you'll have the money available to do that," Ferrara says.