Other than insurance there’s no other product I can think of that we buy and hope we never use. Confusion abounds in the area of insurance. I don’t sell insurance. As a result I have no agenda to encourage you to purchase a particular type of insurance. As a financial planner I understand the importance of insurance. In this article I want to give you a better understanding of the purpose of insurance.
Insurance is a transfer of financial risk. As comedian Chris Rock says, “you need insurance in case (expletive) happens.” Until we become financially self-sufficient to endure the financial risk, being properly insured is vitally important. So when those things that “will never happen to you” happen, you have a risk management plan in place that will help you foot the bill and help you avoid declaring bankruptcy. Below is a brief overview of some basic types of insurance that the average person should have in place.
Life Insurance: Life Insurance is needed to replace the income or economic value of the person who dies. If someone depends on your income or your services, you need life insurance. For in the event of death the availability of income and service go away. However the dependents of the deceased left behind has ongoing needs and expenses. I recommend that you get 20-year level term insurance with a face value that equals 10 to 15 times your annual income. In the event you provide an economic value to the household as oppose to an income. You want to calculate how much it will cost to pay for the services you provide. For example: A stay at home mom does not contribute an income. However, she does a wide range of services at home such as cooking, cleaning, raising the children, seeing the children to and from school etc. If something was to happen to the stay at home mom you’ll have to hire “Super Nanny” to do the things that she use to do. The only difference is that you’ll have to write “Super Nanny” a check. If you have someone that depends on your income or economic value, you need a minimum of $250,000 in life insurance.
Disability Insurance: Most people underestimate the value of disability insurance. Statistics tell us that you’re more likely to become disabled than you are to die over a 30-40 year working career. A disability to a loved one can create more of a detriment on the family finances then death. In the event of death there are no ongoing expenses associated with the deceased. When a loved one becomes disabled, a family incurs additional expenses while at the same time they lose the income once provided by the person who is now disabled. As a result disability insurance is of paramount importance. Disability insurance replaces between 60–70 percent of a person’s income. Most people can purchase disability insurance through their employer at very reasonable price. There are two types of disability insurance—short-term and long-term. Short-term disability insurance covers you from 6-weeks to 6-months in the event of injury or illness. Long-term disability insurance covers you from 6-months to indefinitely in the event of injury or illness. Long-term disability insurance is the more important of the two.
Automobile Insurance: If you own and operate a motor vehicle you’re required to have liability insurance coverage in most states. There are four primary types of coverage under an auto insurance policy—bodily injury and property damage liability, uninsured and underinsured motorist, collision and comprehensive and medical payments coverage. Bodily injury covers people who are injured in an accident caused by you up to a certain limit. Property damage replaces or repairs property that you damaged in an accident up to a certain limit. Collision covers damages suffered by your vehicle in an automobile to automobile accident. Comprehensive covers damages suffered to your car not related to automobile to automobile accident such as when your car is damaged by a deer. Medical payments cover medical expenses for you and other medical expenses related to an accident of which you’re at fault. Most people tend to have inadequate liability coverage.
Health Insurance: Health Insurance protects against the financial consequences of poor health. Medical bills are the leading cause of bankruptcy. Both medical care and health insurance cost are rising. Fortunately 90 percent of Americans are covered by their employer’s medical plan. A few important things to understand regarding your health insurance coverage are your co-pay, deductible, and your stop-loss which all deals with the amount of out of pocket expenses you’re responsible for. For those individuals who are self-employed and cannot get group insurance prices, the new Health Savings Accounts may make health insurance more affordable. The Health Savings accounts also offers some tax advantages.
Homeowners Insurance/Renters Insurance: Those who have mortgages are required to have homeowner insurance. Not too many people understand what their homeowner insurance covers. The primary reason for homeowner insurance is to replace your home or the contents inside your home in the event of fire, theft or other natural disaster. The basic homeowner insurance policy covers dwelling, other structure, personal property, loss of use, and liability. There’s also additional coverage that can be purchased to fill in the gaps not covered by the basic coverage. The dwelling coverage chosen should be equal to the value of the property or the cost to replace the property. All other forms of coverage are based on a percentage of the dwelling coverage. Always seek homeowners insurance that has an inflation guard. This means the dwelling limit will increase each year at a certain percentage to account for housing appreciation from year to year.
(Mortgage and Money Coach Damon Carr is owner of ACE Financial. Damon can be reached at 412-856-1183.)