Financial Plan – Insurance

As we continue on our path to a financial plan the next stop is one that may get a little complicated and that is in the area of insurance.  Now there are many types of insurance and all are important and have their place in your financial plan.  The main point of insurance is to mitigate the risks that you cannot afford to cover on your own if something bad were to happen.  Many insurance is now mandatory by either the government or financial institutions.  But we will mainly be looking at life insurance, disability insurance, and long-term care.

Most people do have health insurance if they work for a large employer on a full-time basis through that employer.  But even if you do not get that benefit through work health insurance is now available through the Affordable Health Care Act.  Now days there is really no reason why everyone in America should not have some form of health care.  By having health care it reduces the chances that you will be hit with a large medical bill that will wipe out your hard earned savings.  No I am not saying that by having health insurance you will not ever be hit with large medical bills because that does in deed happen and it happens to a lot of people every year.  But by having health insurance in place you will reduce the risk of large medical bills.

Insuring your assets is next on the list of insurance we will just briefly discuss.  Most states require at least liability insurance on autos and if the auto is financed the lending institution will require full coverage of liability, comprehensive and collision insurance on the auto.  Houses are the same way with the lending institution requiring at least the amount of the loan be insured for their protection.  It is a good practice to evaluate your residence insurance every few years to make sure that the cost to replace your residence is not out of line with the amount of insurance you carry.  Another type of insurance that goes with these two types is extra liability insurance or an umbrella policy that is done in conjunction with your homeowner’s policy.  Usually for a minimal annual premium you can get a million dollars in liability coverage as added protection.  Remember insurance is about managing risks you cannot afford to fund out of your savings in the event something bad occurs.

Life insurance is an insurance that is not required by any law, statute, government, or lending institution.  This is a policy that is up to you as t if you do in fact need it.  If you are young, single, and have little debt there may not be a need for you to have life insurance or at least a large policy.  Also when we are younger we do not as a rule have much in the way of disposable income making a permanent policy cost prohibitive.  But when you are younger you can purchase large amounts of term policies.  These are policies that accumulate no cash value and expire when the term ends.  The only way these policies will pay a death benefit is if you die during the period of time covered by the term.  Permanent policies are in place until you die or stop paying the premiums.  These policies will accumulate a cash value and will in fact stay in place for the rest of the insured’s life.  For a brief look at the different types of insurance you can get my eBooklet from Amazon.com or by clicking the following link, The Basics of Life Insurance.

Now there are many ways to determine what kind of policy you need or the amount that you think you need to have in place.  As a general rule it is a good thing to remember that you are managing risk here and there are many ways to get to a correct answer.  Personally I believe that many people may have a need to have a combination of policies to achieve their desired goals.  As someone gets older they in theory require less coverage.  This is because as you get older your expenses that need to be insured are decreasing.  Think of it this way if you will.  You bought your house when you were younger and therefor you needed to insure your family for the value of the mortgage in the event you were to die.  The same goes with your children’s college expenses.  But after a certain age you will no longer need to fund your children’s college or pay off the mortgage as you have already funded those expenses.  Also when you retire you will not need insurance to replace your income as you are no longer earning any income.  So it may make sense for the main wage earner to have two term policies in place at the same time.  Say one is for 20 years to help cover the cost of college for your children as well as any other bills you wish to be paid off when you die.  The other policy should be a 30 year policy to match your mortgage.  Now here is a third option and that is to have a permanent policy in place to cover any final expenses or to cover any outstanding issues that you wish to be taken care of upon your death.  As you can see there is no one right or wrong approach to life insurance and in many instances a combination may be the correct answer.  As for how much insurance you need that will depend on where you are in your life.  Consider all aspects and take appropriate action to ensure you are covered and are able to mitigate the risks.

Now disability insurance is another that is not a required policy to have but one that is worth looking into to also help mitigate the risk of lost income.  These policies will generally replace a portion of your income either for short-term or long-term depending on what type of policy you buy.  Short-term policies generally are for periods of less than two years and have a waiting period before benefits are paid.  The longer the waiting period you have before benefits are paid the cheaper the policy will be.  For long-term policies they will generally wait anywhere from 90 days to 6 months before benefits will be paid.  These policies will also be particular in what occupations will be paid benefits.  Some will pay you provided you cannot work your own occupation while others will pay provided you cannot work in any occupation.  As a general rule these policies will not pay more than 60% of your salary and will end after a certain number of years or age 65 when social security will be available to the insured.  This insurance can be expensive depending on how you set it up.  For people who have shorter waiting periods, limit the policy to their own occupation, and have long lengths for their payments will pay more than someone who choses more lenient options.  It is good risk management to have some protection on your income to cover you to a degree in the event you are unable to work.

Long-term care insurance is a more expensive insurance to have and again this is one that is not required by any law or statute.  This insurance is somewhat similar to disability insurance as the premiums will depend on several factors. One is the age in which you take out the policy.  The younger one is when they buy the policy the lower the premium will be because in theory you will be paying the premium a longer period of time.  Another factor that has a large impact on the policy’s premium will be the waiting period from the time you are first admitted into long-term care and when the policy will begin to pay.  The longer the waiting period the lower the premium will be but the more out of pocket expenses you will have to pay.  These policies are also limited to a set amount that they will pay per day of care and generally they are for a period not to exceed 5 years or a maximum dollar amount.  The final main component is if the policy will have inflation protection which will adjust the amount the policy will pay in accordance with inflation.  It is not uncommon for the premium of this insurance to run $400 to $500 a month for someone who is in the fifties.  The premiums are much more reasonable for younger people but then again you have to remember you will be paying for a longer period of time.

Long-term care is one type of insurance where someone in theory can self-insure.  This is done by someone who is diligent and has the will power to ensure that they do save the amount they would pay for the premium for the insurance.  An example of this is if someone’s premium $300 a month they can self-insure by investing that money in a low expense mutual fund or exchange traded fund such as an indexed fund.  By investing the money that would have been spent on the premiums in such a manner a person can expect to have a sizable amount saved that can be geared towards long-term care or in the event that they do not need that they have funds that can be used for other purposes or left to heirs.  While most people today will need some form of long-term care the length and amount they will need will definitely vary from person to person.  But someone who is 25 and saves the $300 a month premium for 40 years and got an after tax return of 5% would have approximately $450,000 to self-insure or leave to heirs.  This is an insurance that people really need to think about and consider many factors prior to purchasing.

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