Insurance plays a vital role in your financial plan. A comprehensive insurance plan, which can include everything from auto insurance to disability insurance, helps protect you, your family, and your wealth. Without insurance, most people would have difficulty coping with major and unexpected financial setbacks. Insurance is a reasonable way to plan for worst-case scenarios that we all hope never become reality. In many ways, it is the bedrock that supports your overall financial security. Some might even argue that if you have to prioritize, it is more important to focus on developing a solid insurance plan before you worry about issues like investing.
Where Do I Start?
Most people already have some insurance. A typical adult with a family and a job might carry auto, life, and homeowner’s insurance (not to mention health insurance, which is another essential coverage). But most people purchase their insurance piecemeal, picking up a policy here and there when they need it. Rarely do people have a coordinated insurance plan that aligns with their overall financial plan.
Thus, your first step in developing an insurance plan should be sitting down and taking an objective look at your total financial situation, perhaps with the help of a financial advisor. Consider your age, family situation, the risks you face, and current assets and liabilities. This will help you identify areas where you might need the peace of mind that quality insurance provides.
For example, parents with young children will almost certainly want life insurance, while people who suspect there’s a good chance they’ll end up in a nursing home may want long-term-care insurance. Sound complicated? It can be. Unfortunately, there is no off-the- rack or one-size-fits-all approach to buying insurance.
Evaluating Your Risk and Determining Your Needs
Determining what kind of insurance you need to protect yourself and your family begins with an honest evaluation of the risks you face. That helps you decide what kind of insurance you’ll need. But that’s just the beginning. For example, if you have young children, you probably know you need life insurance. But how much is enough and what variety (whole- or term-life) is best? And what about other types of coverage? Should you buy umbrella insurance or disability insurance?
Life insurance tends to be the area where people have the most questions about whether their coverage is adequate. To determine your needs, imagine the unthinkable: How would your family survive if you were no longer there to support them? Don’t just choose a big number and assume it will be enough.
Consider this: You have a life insurance policy with a $1 million death benefit that you think will be more than enough to provide for your family if you pass away unexpectedly. Tragically, you die, and your surviving spouse uses $400,000 of the benefit to pay off your mortgage and some other debts, pay for your funeral, and cover other miscellaneous expenses. That leaves just $600,000 for your family.
If your beneficiaries invest that sum in a fund that earns an average 5%, that translates to a monthly income of $2,500. That amount may not be enough to meet all your survivors’ financial needs. And that assumes your financial situation is relatively uncomplicated. If you have children with special needs or who will be attending college soon, you may need even more insurance.
When it comes to disability insurance, you may be tempted to rely on your company’s policy, but that might be a mistake. The coverage may not be as extensive as you expect, with a limited benefit period or narrow definition of disability (you may only get benefits if you aren’t able to work in any occupation, not just your current occupation). Robust disability insurance coverage is essential if you do not have the resources to replace your current income should you become unable to work.
Long-term-care insurance is another essential component of many people’s financial plans. Given the high cost of nursing home care or a stay in an assisted-living facility, the need for these types of services in retirement would bankrupt many, even those with substantial retirement savings. If you suspect you or your spouse might need such care, a long-term-care policy is one way to protect your assets and reduce the risk that you will run out of money paying for a nursing-home stay.
Clearly, insurance and financial planning are intimately intertwined. It is difficult to separate one from the other. If you have questions about whether your current insurance coverage fits with your overall financial needs, please call to discuss this in more detail.