By Russ Gaiser
Insurance. You can insure almost anything nowadays from cars to card collections to your life. Within each category, there are tons of policies, companies, and factors to consider, which can make it extremely difficult to know what to buy and what not to buy.
Russ Gaiser
A good place to start is to understand what the purpose of insurance is, and what it is used for. Insurance is simply a way to mitigate risk by shifting it from you to the insurance company. People have different assets, goals, values, and objectives so this will vary from person to person and family to family. However, there are a few types of insurance that everyone should have (or strongly consider) as a part of their overall financial plan.
Let’s examine some common types and rate them as Must Have, Situation-Based, or Avoid.
Health Insurance
Your health is your wealth. Let’s face it—without being healthy, you can’t enjoy life to the fullest. And from a financial perspective, the number one cause of bankruptcy is due to medical bills from illness and injury.
Not only is it important to have health insurance, but it is equally important to understand how your plan works, and what it covers. Before making any changes to your plan, be sure that it covers the care you are currently receiving, such as chemotherapy treatments and other chronic illnesses. In my previous career as a health care administrator, I have seen first-hand the negative impact of changing insurance without asking the right questions.
Verdict: Must Have
Auto Insurance
This might seem like a no-brainer as it is the law in many states to have your vehicles insured. But there are still uninsured motorists on the road. While many people just try to shop for the cheapest rates, that might not be wise. You should consider liability coverage amounts and whether or not to have collision. The wrong decision could end up costing you much more down the road. Consider increasing the deductible rather than skimping on coverage as a way to reduce the premium.
Verdict: Must Have
Home/Renters Insurance
Homeowners insurance might also seem like a no-brainer as in many cases it is a requirement to have, but protecting one of your biggest assets from fires, natural disasters, and other calamities is paramount. As for renters, having insurance is important to cover the valuables inside your residence in the case of loss.
Verdict: Must Have
Umbrella Insurance
Excess liability insurance, otherwise known as umbrella coverage, raises the amount of liability coverage in increments of $1,000,000, on top of your home and auto policies. For the amount of coverage, these types of policies are very inexpensive. So, do you need it? If you have a net worth (what you own minus what you owe) upwards of $500,000, or have a high annual household income of $250,000 or more, then it should strongly be considered.
Verdict: Situation Based
Life Insurance
Life insurance can be complicated because there are so many types of coverage and many companies that offer that coverage. The first thing to consider is if anyone relies on your income and what they would do should you happen to lose your life. Having a mortgage, raising a young family, or if you are the sole breadwinner saving for retirement, are some things that need to be considered.
If you fall into one of these categories then the question becomes, how much of a death benefit do I need? Ten to twelve times your annual income is a good starting point, but it could be more or less, depending on the variables above. The goal would be for the principle to return an income large enough to replace what you used to bring in. The cheapest way to attain the highest level of coverage is through level-term life insurance, with the goal of being self-insured by the time the term lapses. Insured through work? This is good access to cheap coverage, but you will leave your job at some point, so it is recommended you carry an individual policy in addition to your employee benefits.
Verdict: Situation Based
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Short-Term Disability
Short-term disability insurance usually covers a portion of your salary if you are unable to work for a short (think less than 6 months) time due to a covered disability. Policies can be offered as employee benefits, but if you decide to leave your job or need more coverage, it would be wise to have a policy outside of your employer. Short-term disability can be pricey, so it is recommended that you have a strong emergency fund (in cash) to cover any sort of short-term disability to save on the premiums.
Verdict: Avoid (if you have proper emergency cash savings)
Long-Term Disability
Long-term disability insurance kicks in when you are deemed to have a disability that prevents you from doing your specific job, or any job. This distinction is important to note when looking for policy quotes. The idea is that you want coverage to cover you if you are unable to work your specific job, especially if you have a unique skill that helps you earn a living. Long-term disability can take up to six months from date of injury to kick in, which is why short-term disability insurance is important if you do not have adequate emergency cash savings.
Verdict: Must Have (during working years)
Long-Term Care Insurance
Depending on the state you live in, this type of insurance might not be available, or if it is, it might be too expensive to acquire. Nursing home care is expensive and can be upwards of $15,000 per month, with the average stay lasting 3 years ($540,000). Long-term care insurance covers nursing home stays while leaving your savings intact, however, if you don’t use it, the policy dies with you.
What is becoming more popular to solve this problem is certain life insurance policies that have accelerated death benefits that can be used to cover long-term care costs. If you don’t end up using those benefits, then you still leave a tax-free death benefit to your heirs.
Verdict: Situation Based
Identity Theft Protection
Everything in this day and age is on the Web, which means your personal information is out there. To avoid being a victim of identity theft, which costs money and time to restore, having protection in this area is imperative. There are many carriers out there; look for one who can go to court on your behalf to restore your identity so you can continue earning an income!
Verdict: Must Have
Final Thoughts
It is important to understand where your financial vulnerabilities lie and to protect them with insurance. It can benefit you to work with a broker to shop rates rather than relying on the company with the best commercials (you are paying for those commercials after all!). Keep in mind that obtaining the cheapest quote should not be your only consideration—your broker should advise you on having the proper coverage limits in place based on your situation. The last thing you want if you lose your home in a fire is being told that your coverage is not enough to cover the rebuilding cost.
About the author: Russ Gaiser
Russ Gaiser is a financial advisor at The Financial Guys in Buffalo, NY, where he focuses his practice on wealth building and retirement planning. He is also a Dave Ramsey Master Financial Coach, helping clients to improve their budgets, maximize cash flow, eliminate debt, and build wealth for the future.
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