Risk Management: Having The Right Insurance Coverage
Posted by: Joseph Kuo | June 24, 2022
When it comes to creating a sound financial strategy, many people think of creating a diversified portfolio or making sure they’re regularly contributing to their retirement plan. But a good financial plan includes insuring against the unexpected and making sure that no matter what happens, you’re covered with the right types of insurance coverage.
If you’re younger and have a lot of life ahead of you, you might wonder why you need to consider disability insurance or life insurance. But the point of insurance is to expect the unexpected and make sure that you’ve taken care of yourself and your family if something unexpected happens.
Types of Insurance Coverage
Each type of insurance coverage has different rules and restrictions, and some types of insurance make more sense than others, depending on your age. Talk with your financial advisor to ensure that insurance is a part of your strategy.
Property insurance can take a few different forms: Homeowners insurance, Renters insurance, or insurance against a specific natural disaster, like flood or earthquake insurance. Property insurance typically covers the building itself and the contents within it should something happen. A rental policy will cover your possessions as a renter should something happen to your building. You’ve spent a lifetime building up your possessions; if everything were lost tomorrow, you wouldn’t want to outlay the funds to rebuy everything you own.
If your home is your primary asset and you live in an area vulnerable to certain types of natural disasters (such as earthquakes in California), you should absolutely consider catastrophic coverage for those types of disasters. Premiums for such policies will be high, but it’s worth the protection and the added peace of mind.
If you have a rental property, you should also strongly consider liability/casualty insurance as mentioned below.
Casualty Insurance Coverage
Casualty insurance protects you against claims or lawsuits made against you by outside parties. Casualty insurance is already bundled in if you already have homeowners and auto insurance. For example, if someone falls down your deck stairs because you failed to maintain them, the casualty part of your homeowners insurance would cover this type of claim. However, such coverage can be limited in the amount of liability covered.
If you have a high net worth, consider an additional Personal Liability Umbrella Policy (PLUP) to cover the difference between your regular casualty/liability coverage and what you could lose in a lawsuit. Some PLUPs can also cover legal fees should you have to defend against a lawsuit. Obviously, as a PLUP policy covers your entire net worth and could increase the incentive to sue you, it’s a policy you want to be discreet about having.
Life insurance will provide financial support to your loved ones after you’re gone. You’ll pay a premium, typically monthly or annually, and the policy will pay a death benefit to your beneficiaries after you’re gone. Death benefit money, which is typically tax-free, can be used to pay funeral expenses, mortgage or rent payments, and day-to-day living expenses. With certain life insurance policies, the benefit can also be used to help with medical expenses from a terminal illness. Younger people typically overlook this type of insurance, but once you have dependents, life insurance should be a part of your family’s financial plan.
Advances in medical technology make it more likely you’ll recover (and recover more completely) from a serious accident. This is of course a great thing, but while recovering, you’ll need disability insurance to maintain quality of life and help cover lost income as you recover.
It’s helpful to think of disability insurance as insurance for your income. The two types of disability insurance—short term and long term—are typically offered as part of or in addition to your insurance options provided by your employer. Some states will also provide a form of short term disability. Short term disability typically covers periods of injury or disability from 13-26 weeks, while long term disability usually offers several years of continuous income replacement after a work-ending workplace injury. Although these policies only typically cover a percentage of your previous income, remember that the amount provided by long term disability insurance is actually after tax (net) income, meaning that you will be getting an amount closer to your actual income than you might expect.
Extended Care Insurance Coverage
Sometimes referred to as long-term care insurance, extended care insurance is designed to help cover you after age 65 and provide in-patient or at-home care for a chronic condition. Extended care insurance can cover nursing homes, assisted living facilities, home health aides, and private-duty nurses. Extended care insurance is also less expensive the younger you are, so if you’re approaching 50, it’s something to start considering.
Extended insurance picks up where medical insurance leaves off. Medical insurance primarily covers the cost of direct treatment of a condition. But once treatment has concluded, long term care insurance covers daily care for that condition.
There are limits to extended care coverage. To qualify for an extended care claim, you would need to show that you can no longer perform two of the five typical activities of daily living (bathing/showering, dressing, getting in/out of bed, using the toilet, eating).
Work With A Fee-Only Advisor To Make Sure You’re Covered
Insurance is an essential part of your life and financial strategy. By preparing for the worst (while hoping for the best), you’ll be able to handle any changes in your life and provide yourself with some protection against significant disasters or illnesses. Remember, you can’t control everything that happens in life, but you can create a plan that will support you no matter what. An experienced financial advisor can review your financial situation, point out potential gaps in your coverage and make sure you have the right amount of protection for you and your family. If you do choose to work with an advisor, make sure they are fee-only and thus will not have a vested financial interest in selling you insurance.