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On Finance: Insurance
While most people don’t realize it, insurance is a critical aspect in protecting their financial assets — and future. While there are legal, contractual, and personal reasons to carry different types of insurance, the primary aspect is always the same: to manage financial risk and exposure. All the financial security gained through years and years of careful planning and management can be lost in moments through misfortune or accident. Insurance is a critical vehicle to protecing what has been so carefully built.
Insurance is used to manage the financial impact of certain types of events. These might be the loss of a key asset such as a house, the cost of medical procedures, the loss of income from a disability or death, or the loss of money as a result of being found liable for someone else’s loss. While you can get insurance for practically anything, there are a variety of different standard insurance policies available to meet the most common needs.
One mistake people often make make is to view insurance policies piecemeal, looking at each policy individually without evaluating their overall insurance needs. This leads to overlapping coverage with too much coverage in one area of their lives and insufficient coverage in others — while probably paying more than they need to pay for the coverage. By talking to a qualified financial planner and/or am insurance professional, one who handles a broad range of insurance, most people can probably get more comprehensive coverage for less than the piecemeal approach would provide.
Another mistake I believe people make is to rely on the insurance coverages offered by their employers. While this was probably fine when people worked for one company for their entire lives, with today’s career mobility I believe it puts a critical part of your financial plans into the hands of fate. I have seen many who have lost insurance coverage when companies have gone under and are unable to acquire private insurance due to pre-existing conditions. I think it is better to have your own coverage, independent of employment, that you can maintain through your entire life. Get medical and life insurance while you’re young an healthy and don’t let it lapse.
There are so many types of policies and plans available that an insurance professional is really required to put together a comprehensive coverage plan. For our purposes here is is probably easiest to view insurance coverage as protecting three primary things; loss of income, expenses, and loss of assets.
Loss of Income:
Typically Income is critical to financial planning. For most people this means wage income used to pay for daily living expenses while building assets that will support what you want to do in the future. Providing an alternative to that income in the event of a disability, death, or other loss is important to financial stability. The two most common forms of insurance policies used to protect these are disability insurance and life insurance.
How much of each type of insurance will vary throughout your life. A single person without dependents may need very little, if any, life insurance and only a modest lifetime disability policy. A primary income earner for a young family of six, a mortgage, and no investments may need very large policies for life and disability. A retired person living the good life on the income from a large investment portfolio may need not need life or disability insurance (although there may be good estate planning reasons to carry them).
Not carrying the proper short and long term disability coverage and life insurance policies puts at risk all you have built and are trying to build in your financial planning.
As you move from having your income shift from employment income to investment income, a different realm of protection needs to come into play. This is typically done through investment strategies as well as normal insurance policies. The methods of protecting investment income is beyond the scope of this missive. When you get to that stage in your life get a good wealth management group to work with.
Regardless of where you income comes from you need to take some measures to protect yourself for the most likely losses.
Expenses:
Unexpected expenses from events in your life can quickly eat up what you have been building. The source of such expenses are unlimited. While it is impossible to plan for everything, there are policies for the most common critical life events that disrupt a financial plan. Among the most common are medial insurance and liability insurance.
Medical insurance can take a variety of forms. Again, I personally recommend a stand-alone policy this is not through your employer. It may be a bit most costly, but provide for consistent and ongoing coverage not dependent on current health or employment. Catastrophic policies are available to cover the worse possible situations, or as additional coverage if you do elect employer provided insurance.
Health issues WILL come up over time, medical insurance is the only reasonable way to manage the risks of increasingly expensive healthcare costs.
Liability insurance covers you when you are found liable for someone else’s lost. Liability insurance is not something most people don’t think about, but almost everyone carries some liability insurance as part of their automobile and home owner insurance policies. These coverages may or may not be enough or comprehensive enough for your needs. A good insurance professional can work though the details with you.
Loss of Assets:
Home, automobiles, boats, and planes are some of the major assets whose loss can be expected to impact your financial plans. Insurance on these are considered so important that banks require comprehensive loss insurance coverage for you to get a loan on them. If they are important to your financial plans you should have the appropriate coverage.
A special note should be associated with home owner insurance. These policies usually cover not only the house and contents, but often have far more coverages include or available including personal liability, off-property property coverage, and a host of other things. This is usually the first stop in getting these other coverages for your life. These additional ridders should be considered and reviewed regularly to match your changing situations.
Posted by Paul Gernhardt on Tuesday, December 30, 2008