Very few people enjoy talking about insurance. It is complicated with in-force illustrations, riders that affect coverage and premiums, different levels of coverage, cash balances, guarantee disclosures—it’s overwhelming to handle. Then there is the bitter reality of paying for something you may never use. It’s a consumer’s worst nightmare. Add in a salesman vying for a commission, and it’s no wonder investors want to avoid it.
Start looking at insurance as a risk management tool. It is not a financial plan in and of itself, but a tool used within a plan to protect you from the unexpected. Any setback that jeopardizes your future income could significantly derail your financial plans. This could be anything from a catastrophic car accident where you’re responsible for the livelihood of the person you injured, to a disability that limits your ability to work and earn a living while you have to pay for therapies or care so you can return to your top health. Even the death of you or your spouse that results in one less paycheck to support the family. Circumstances like these would fundamentally change your financial future. Insurance can protect against these catastrophic events by providing income replacement.
Personal liability, often called an umbrella policy, provides coverage against catastrophic liability exposures by extending the coverage provided in your automobile and homeowner policies. Think of this type of coverage as protecting the assets you already have. It can also cover personal injuries, including libel, slander, and invasion of privacy. Umbrella coverage can add a million, or several million, more dollars to the auto and homeowner policies’ liability limit. We typically recommend coverage up to your total net worth. The policy should also cover legal defense costs. That might sound like a lot more than you think you need; however, you are exposed to these risks in your everyday activities.
The next thing you want to protect is the money you earn. A young adult is three times more likely to become disabled than to die. Your most important asset is probably not your home or your 401(k). It is your ability to earn a living. Everything you have been planning—paying for your child’s college education, buying your dream home, and retiring—hinges on your ability to bring home money until you retire. This is where a disability insurance policy fits into your financial plan. A disability policy can provide between 40% and 60% of your income if you are unable to work because of a disabling event.
When looking at life insurance, we prefer to look at the economic impact on the family should you or your spouse die. Life insurance can be used to maintain the lifestyle of a surviving spouse; provide resources for your children to attend college; protect a source of income after a divorce; secure your home by paying off the mortgage; protect the transition of your business; provide for an aging parent or other dependent, and charitable giving, enabling you to make a larger gift than you otherwise could afford.
As you gain assets throughout your life and near retirement, your need for disability and life insurance dwindle and are often replaced with the need for long-term care insurance. The cost of long-term care is significant and has the potential to drain your retirement resources. You should tailor your long-term care coverage to both your budget and your quantified risks to protect your retirement assets and any inheritance you wish to leave to your heirs.
If you have questions regarding your insurance coverages, the experts at Henssler Financial will be glad to help: