Insurance – “The Basics” on when and how to cover contingencies

The purpose of insurance is to cover a specific contingency—risks to life, health, income, property—that insurance companies can pool and provide under an affordable monthly premium. Insurance is a contract and it must be read and understood completely. Properly understood and applied insurance is an invaluable part of your financial life and to building wealth. The wrong insurance, on the other hand, can drain your finances, not cover the contingencies you need. In effect it can derail your wealth building plan. Below are some basics to think about when considering your insurance needs but there are many more than can be discussed here. All insurance tools need to be reviewed from two perspectives: 1) identifying the tools you need throughout life’s ups and downs and 2) the level of coverage that you need (this can change from year to year).

Life Insurance – this tool is essential for anyone who has a dependent. It should always be purchased to cover the future needs of those who are dependent on the insurer’s income. Once you have a target amount you need to focus on obtaining a contract from a reputable company for the least cost over the period you’ll need it. If your cash flow is limited, there are no dependents and your assets are under $5M, then there is no need for life insurance. Similarly, if your cash flow is limited but you have many dependents then only consider term life insurance. This type of insurance is best purchased outside of employer plans and additional amounts can be supplemented from employer benefit plans (if needed for a short period of time).

Disability Insurance – this tool is intended to cover a percentage of your income for you and dependents if you’re disabled (mentally or physically). We highly recommend anyone under 65 consider purchasing long term disability insurance. It is least expensive if purchased within an employer plan but if you’re healthy may be reasonable as private insurance. Self employed or small business owners should purchase personal long term disability insurance while they have sufficient earnings and are healthy.

Long Term Care (LTC) Insurance – this tool covers the cost of care if you’re unable to perform the basic acts of living (dressing, washing, etc). Although you may need it before retirement most individuals purchase this insurance to cover LTC in retirement. The rates do increase with age and may not be available after you’ve developed health issues.

Liability Insurance – this tool protects your wealth from legal actions. Some liability insurance is part of your auto and house insurance but additional liability insurance is purchased as “Umbrella coverage”. This is a relatively inexpensive coverage and the amount changes as your wealth grows.

P&C Insurance (Property & Casualty) – these tools protect your property (auto and house). Your insurance broker/agent can review the latest options, the benefits, and premium available to you. We encourage you to be aware of your policy and get as much insurance as you’ll be willing to claim and as fits with your financial plan.

Of course there are other insurance tools and new ones being created every year. If you wish to discuss a specific insurance tool we’ll help you better understand it and determine if it is a tool that would be appropriate for you.

Edi Alvarez, CFP®