Insurance Protection - A Priority in Planning
Insurance has got to be one of the most boring subjects in personal finance. It’s not “sexy” like stocks, options, bitcoin or real estate. But, it must be your priority in planning your financial life.
You can skip it but it will be at your peril. I find that most people don’t skip it on purpose but, rather, out of ignorance. So, to keep a boring subject as short and painless as possible let’s jump right in.
Insurance is about RISK MANAGEMENT.
Its about protecting your most valuable assets - so you don’t lose what you’ve worked for.
Here are several keys to consider when analyzing your Insurance Portfolio:
Insurance Protection should be your FIRST consideration. It makes little sense to save and invest if one life event can wipe you out.
Insurance Protection should provide FULL value coverage of the the asset for its replacement cost. If your house burns down you want the whole house for what its worth to be replaced. If you wreck the car you want the whole car replaced for what its worth - not some old piece of junk with 4 wheels. If you get disabled you want your take-home income to be replaced so you can pay your bills like you did before. If you die you want your family to have all the things you would have provided had you not died.
Insurance Protection should cover your assets for the life of the asset. At no time should you “self-insure” against catastrophic loss. Your mortgage company makes you carry Home Owner’s Insurance because they aren’t willing to risk the loss of your home. Just because you pay off your mortgage you wouldn’t go out and cancel your insurance would you?
With insurance we want maximum benefits at the best premium by the highest quality carriers (insurance companies).
What types of insurance should you have?
I advocate a portfolio of Primary Coverages for most average households. These include:
Liability Insurance - make sure you have sufficient excess liability coverage like an Umbrella Liability Policy to cover you in case you are in an at-fault accident or somebody has an accident on your property. I recommend this should be at least $1,000,000 or your Net Worth whichever is higher. if you get sued you’ll have the insurance company at your back - they don’t want to pay that if they can help it.
Disability Insurance - if you work for your money you’ll want to protect that income in the event you get sick or injured and cannot work. Your income should be protected for at least 60% of your gross income and to age 67 if possible. Make sure you look into “Own-Occupation” definitions - so your income is protected if you can’t perform the duties of the occupation you are trained and educated to do.
Health Insurance - This pays doctors and hospitals to get you better if you are sick or injured. Medical bills can be tens or hundreds of thousands of dollars so a major medical plan will cover this. In most cases this type of insurance is offered through an employer or through the Healthcare.gov if you live in the USA. Dental and Vision Coverage falls under this category and I do recommend these if it helps you have good dental and vision care. Dental and Vision are usually limited in their payout - you must use them to get your money’s worth.
Life Insurance - if anybody depends on you then you need to protect your family by having life insurance. If you die, they would not only lose you who they love but also your income that you provide. Non-working spouses also need life insurance to provide the funds to pay for the services the family will need like childcare and other contributions. You should carry enough life insurance to pay for your final expenses, pay off your debts and liabilities, provide college funds for children and provide income for living expenses. The goal should be to keep your family in the “same world” they were in - not to make them “rich” or to leave them broke and destitute.
Critical Illness - I sometimes now include this coverage as a primary insurance because of the higher health insurance deductibles and waiting periods of other insurances. This type of insurance pays a lump sum if you are diagnosed with a critical illness like cancer, heart attack, stroke and many others. I recommend at least 50% to 100% of your annual gross income in critical illness benefits.
Long Term Care - if you are over the age of 50 - you might consider looking at Long Term Care Insurance as part of your retirement planning process. Consider diverting Disability Insurance Dollars toward Long Term Care if you are over the age of 55 or 60. The problem with Long Term Care is that its likely to happen to you and its expensive - you cannot have a secure retirement without at least considering the impact that Long Term Care will have on your net worth, your survivor and your legacy plan.
What about supplementary or other insurances?
Generally speaking, I don’t recommend supplementary insurances unless you are funding all your other goals first like debt elimination, savings & investing, retirement planning and so on. If you desire other insurances then this should come out of your lifestyle budget instead.
Supplementary Insurance is sometimes more expensive when you compare benefits per premium dollar. It isn’t as efficient as primary coverage because supplementary insurance usually covers “first dollar losses”
Types of supplementary insurance includes:
Accident Plans
Hospitalization Plans
Travel Insurance
Warranties
Riders
Some insurance has riders that can be valuable to add. For example, Chronic Care Riders are usually included on Life Insurance now so that you can spend life insurance on Long Term Care expenses before you die. Or Disability Insurance might have a rider allowing you to increase your coverage with inflation so it keeps up with your increasing income over time.
Waiver of Premium riders can waive the premiums on your insurance if you are disabled. This way, if your income goes down you don’t risk losing your valuable coverage at the wrong time.
Take a look at the riders available on the insurance you have or are considering and evaluate the benefit of these compared to the rider premium cost.
A final few tips regarding Insurance Protection:
“First Dollar” protection costs you the most. What this means if you want the insurance company to pick up the tab right away (low deductibles) you’ll pay a higher premium. But, if you are willing to accept more “front end” risk by covering those “first dollars” then the insurance company will lower your premium considerably. I recommend carrying as high a deductible that makes sense for your situation.
Auto Insurance - carry $1000 or more deductibles for considerable savings
Health Insurance - consider an HSA account coupled with a high deductible plan to keep your premiums low
Disability Insurance - Push out your waiting period to 6 months for optimal premium savings. Then keep a substantial emergency fund (6 months living expenses) just in case.
Never Self Insure against catastrophic risk. You aren’t that rich or that smart. One unforeseen life event can wipe you out! Transfer that risk to the insurance company who are masters at managing risk by pooling risk with many other people.
Insurance is an amazing invention of the human mind! It allows you to enjoy your life, have peace of mind and take some calculated risks in life making life more exciting and adventurous. It gives you psychological clearance to go out and LIVE without WORRY! See! Insurance can be “sexy” after all!