Why Insurance Should Be Part of a Comprehensive Financial Plan
Why Buy Insurance?
When you drop a quarter into a slot machine, you know that your chances of winning are pretty slim. But risking a quarter (or perhaps much more than a quarter) may be worth it to you if the potential payoff is great enough. Insurance is a lot like that. You pay premiums not because you expect to die today, get into a car accident next week, or lose your home in a fire next month, but because the peace of mind it offers and the financial protection it could provide are worth it. You don’t have to bear the risk of financial loss alone. Insurance is all about risk and financial protection.
Do you feel lucky today? The concept of risk
We all face risk–the possibility of injury, illness, death, or property destruction–each day. Although you can never eliminate risk, you can guard against financial loss by shifting part of your financial risk to a larger entity (your insurance company) that’s in the business of dealing with that risk. In return for your payment of premiums, your insurance company agrees to pay you (and/or others) a certain amount of money for a specified loss. This loss may or may not occur, so both sides gamble. Still, the potential benefits of insurance may be well worth the cost.
You can limit or eliminate some of your risks with the right type of insurance
Consider the possible losses associated with each risk you’ve identified. For example, assume you have a spouse, two minor children, a mortgage, and various debts and expenses. If you die within the next few years, how much money will your spouse need to pay off the debts, meet expenses, and perhaps even send the children to college? Or what if your 68-year-old spouse (or parent) suddenly suffers a stroke and requires around-the-clock care in a nursing home? How will you pay for it?
Insurance coverage can protect you, your business, and/or your loved ones from the financial loss associated with your risks. There are many different types of insurance to consider. These include life, medical, disability, auto, and homeowners, to name just a few. Most types of insurance are optional, but some–like auto insurance–may be required by your state or lender. Even if a certain amount of insurance coverage is required, though, you may want to purchase additional coverage to protect your assets. And if you have an employer that provides you with one or more forms of insurance coverage, you may want to supplement this coverage with an individual policy.
Explore your insurance options and try to quantify your potential losses. But because an insurance-needs analysis can be pretty complicated, it may be best to sit down with an insurance professional to figure out what types of insurance policies you should buy and how much coverage you actually need.
Weigh the price of insurance protection against the potential benefits
Cost is always an important consideration. Even if you appreciate the importance of disability insurance, you may be unable to afford it. In addition, you should weigh the price of insurance protection against the potential benefits to you. For example, the chance that your dilapidated 10-year-old auto will be stolen is remote–and even if it is stolen, your financial loss would not be great, so theft coverage would be a waste of money.
Each day, you face a variety of risks–risks to your life, your health, and your property. Although you can’t eliminate many of these risks, you can take steps to guard against resulting financial losses. That’s where insurance comes in. If your coverage is sufficient, insurance can provide financial security to you and your loved ones.
Types of Insurance
There are many types of insurance coverage available–here’s a brief overview of what’s out there.
Life insurance provides funds for your surviving loved ones when you die. Your family can use the proceeds to meet a variety of goals. For example, they can use them to replace income lost as a result of your death, to meet periodic expenses, to pay debts you’ve left behind, to help with college tuition and retirement, and to pay for your final expenses and estate taxes. The proceeds are typically paid as a lump sum but may also be paid in installments.
You can obtain life insurance coverage through work, through another organization (e.g., a club or association to which you belong that sponsors a group policy), or by purchasing an individual policy directly from an insurance company. The two basic types of life insurance are term life and permanent (cash value) life. Term life provides life insurance coverage for a specified period of time, while permanent insurance provides protection for your entire life.
Health insurance can safeguard your assets from the high costs of health care. Most people lack the financial resources needed to pay medical expenses associated with a health crisis (e.g., life-threatening illness or significant injury). In addition, the costs of physical exams, prescription drugs, hospital stays, pregnancy, and routine medical conditions can add up and cause you to suffer financial hardship if you must pay for them entirely on your own.
Health insurance pays for all or a portion of specified medical costs. The cost and range of protection that your health insurance provides will depend on your insurance company and the particular policy you purchase. You may be able to obtain health insurance coverage through your employer; through an association, club, or other organization; or on your own by purchasing a policy directly from an insurance company.
Car ownership involves several risks. In a car accident, people may be injured and vehicles or other property damaged. Liability claims against you can put your assets at risk. Loss can also occur through theft, vandalism, or natural disasters. Auto insurance protects you against these risks. A personal auto policy is a contract between you and your insurer that specifies each party’s rights and obligations. State law and/or your lender may require you to purchase at least a minimum amount of auto insurance coverage. Depending on your circumstances, you may wish to purchase additional protection. You can compare auto insurance policies in terms of price, coverage, exclusions, and reputation of insurer.
Homeowners insurance provides coverage if your home is damaged or destroyed up to policy limits. It can also cover your possessions and provide you with compensation for liability claims, medical expenses, and other expenditures that result from property damage and bodily injury suffered by you or others. If you have a mortgage on your home, your lender may require homeowners insurance. Even if you own your home outright, though, you’ll still need homeowners insurance to protect your interests and safeguard your assets. The cost of homeowners insurance depends on several factors, including the amount of your coverage, any endorsements you add to the policy, and policy deductibles.
Condominium and co-op insurance, although similar, differ in some respects from standard homeowners insurance. And if you rent your home, you may want to look into renters insurance.
The threat of a major disability poses one of the greatest risks to your income. A serious illness or injury can put you out of work for a prolonged period or even permanently. If you had to stop working, how would you meet your expenses? Disability insurance policies pay you a benefit that replaces part of your earned income (usually 50 to 70 percent) when you can’t work. You may be able to obtain short-term or long-term disability coverage, or both. In general, disability insurance can be split into three types: private insurance (individual policies bought from an insurance company), group policies typically provided through your employer, and government insurance (social insurance provided through state or local governments).
Long-term care insurance
Your chances of requiring some sort of long-term care increase as you get older. Will you have the financial resources to fund a prolonged nursing home stay for yourself or a loved one? Long-term care insurance pays a selected dollar amount per day (for a set period) for the type of long-term care outlined in your policy. Depending on your policy, care can be provided in a variety of settings, including private homes, assisted-living facilities, adult day-care centers, hospices, and nursing homes. Most policies provide that certain physical and/or mental impairments trigger benefits. The cost of a policy depends on many factors, including the types of benefits, your health, and your age when you purchase the policy. Carriers have the discretion to raise their rates and remove their products from the marketplace.
No matter how careful you are in running your business, accidents happen. If you’re a business owner, you’ll need to plan for these and other risks. You may be interested in several different types of insurance coverage–property and casualty insurance, liability insurance, and group health, life, and disability insurance coverage for your employees. You can buy various types of insurance protection separately, or you can purchase one package that covers many potential hazards. You can also use insurance to protect your business against the loss of a key employee or to transfer a business interest at your death or disability.
Other forms of insurance
There are many other types of insurance, including flood insurance, travel and accident insurance, insurance for your boat or other watercraft, umbrella liability insurance, and even pet insurance. Speak with an insurance professional to learn more about the products available to you.
Periodically review your coverage
Once you purchase an insurance policy, make sure to put a system in place for reviewing your coverage periodically. Thinking of insurance policies as living documents that need regular reviews allows you to update your coverage as your circumstances evolve or change. It’s especially important to review your insurance policies when you have a significant life event, such as the birth of a child or death of a family member.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2019.