The role of insurance in a solid financial plan
By Russ Gaiser
Insurance. These days, you can insure almost anything, from cars to card collections to your life. Within each category, there are tons of policies, companies, and factors to consider, which can make it extremely difficult to know what to buy and what not to buy.
A good starting point is to understand what the purpose of insurance is and what it is used for. Insurance is simply a way to mitigate risk by transferring it from you to the insurance company. People have different strengths, goals, values, and objectives, so this will vary from person to person and family to family. However, there are a few types of insurance everyone should have (or strongly consider) as part of their overall financial plan.
Let’s take a look at a few common types and rate them as must-have, situation-based, or avoidable.
Your health is your wealth. Let’s face it, without being healthy, you can’t fully enjoy life. And from a financial perspective, the number one cause of bankruptcy is due to medical expenses related to illness and injury.
Not only is it important to have health insurance, but it’s equally important to understand how your plan works and what it covers. Before making any changes to your plan, make sure it covers the care you are currently receiving, such as chemotherapy treatments and other chronic conditions. In my previous career as a healthcare administrator, I witnessed the negative impact of changing insurance without asking the right questions.
This might seem like a no-brainer, since it’s the law in many states to insure your vehicles. But there are still uninsured motorists on the road. Although many people just try to search for the cheapest rates, it may not be wise. You should consider liability coverage amounts and whether or not to have a collision. A wrong decision could end up costing you a lot more down the road. Consider increasing the deductible rather than skimping on coverage to lower the premium.
Home insurance might also seem like a no-brainer, as in many cases it’s mandatory, but protecting one of your biggest assets from fires, natural disasters and other calamities is paramount. As for tenants, having insurance is important to cover valuables inside your residence in case of loss.
Excess liability insurance, also known as umbrella coverage, increases the amount of liability coverage in $1,000,000 increments, on top of your home and auto policies. For the amount of coverage, these types of policies are very inexpensive. So do you need it? If you have a net worth (what you own minus what you owe) of more than $500,000, or have a high annual household income of $250,000 or more, this should be heavily considered.
Verdict: Based on the situation
Life insurance can be complicated because there are many types of coverage and many companies that offer this coverage. The first thing to consider is whether anyone is relying on your income and what they would do if you lost your life. Having a mortgage, raising a young family, or, if you’re the sole breadwinner, saving for retirement are things to consider.
If you fall into one of these categories, then the question becomes how much death benefit do I need? Ten to twelve times your annual income is a good starting point, but it could be more or less, depending on the variables above. The goal would be for the principle to earn you a large enough income to replace what you used to earn. the time that the term elapses. Insured by work? It’s good access to cheap cover, but you’ll quit your job at some point, so it’s recommended that you take out an individual policy in addition to your benefits.
Verdict: Based on the situation
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Short-term disability insurance generally covers part of your salary if you are unable to work for a short time (think less than 6 months) due to a covered disability. Policies may be offered as benefits, but if you decide to quit your job or need more extensive coverage, it would be wise to have a policy outside of your employer. Short-term disability can be expensive, so it is recommended to have a strong emergency fund (cash) to cover any type of short-term disability to save on premiums.
Verdict: avoid (if you have adequate emergency savings)
Long-term disability insurance comes into effect when you are deemed to have a disability that prevents you from doing your specific work, or any work. This distinction is important to note when researching policy citations. The idea is that you want coverage to cover you if you are unable to work your specific job, especially if you have a unique skill that helps you earn a living. Long-term disability can take up to six months from the date of injury, which is why short-term disability insurance is important if you don’t have enough emergency savings.
Verdict: Must Have (during working years)
Long term care insurance
Depending on the state you live in, this type of insurance may not be available or, if it is, it may be too expensive to acquire. Nursing home care is expensive and can cost upwards of $15,000 per month, with an average stay of 3 years ($540,000). Long term care insurance covers nursing home stays while leaving your savings intact, however, if you don’t use it, the policy dies with you.
What is becoming increasingly popular to address this problem are certain life insurance policies that have accelerated death benefits that can be used to cover long term care costs. If you don’t end up using these benefits, you’ll still leave a tax-free death benefit to your heirs.
Verdict: Based on the situation
Identity theft protection
Everything is on the web these days, which means your personal information is available. To avoid being a victim of identity theft, which costs money and time to recover, it is imperative to have protection in this area. There are many carriers; look for someone who can go to court on your behalf to re-establish your identity so you can continue to earn an income!
It’s important to understand where your financial vulnerabilities lie and protect them with insurance. It may be beneficial for you to work with a broker to shop around for rates rather than relying on the company with the best ads (you’re paying for those ads after all!). Keep in mind that getting the cheapest quote shouldn’t be your only consideration – your broker should advise you on setting the appropriate coverage limits based on your situation. The last thing you want if you lose your home to a fire is to be told that your coverage isn’t enough to cover rebuilding costs.
About the Author: Russ Gaiser
Russ Gaiser is a financial advisor at The Financial Guys in Buffalo, NY, where he focuses his practice on wealth building and retirement planning. He is also a Dave Ramsey Master Financial Coach, helping clients improve their budgets, maximize cash flow, eliminate debt and build wealth for the future.
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