Managing risk with insurance
Insurance is an effective risk management tool. If a family member were to die or become disabled, would it impact your family's finances? Would the liability costs of an accident affect your savings? If so, you should consider insurance.
The six most common insurance coverage types based on individual needs:
- Life insurance
- Long-term Care insurance
- Auto insurance
- Homeowners insurance
- Liability insurance
- Disability insurance
"Life insurance is a contract between you and an insurance company that can provide funds (death benefits) to pay expenses upon the death of the insured."
Life insurance is a contract between you and an insurance company that can provide funds (death benefits) to pay expenses upon the death of the insured. Death benefits can be passed on tax free to beneficiaries if properly structured.
Term life is a contract with a set duration limit on the coverage period. The contract pays a stated benefit if the insured dies within a specific time period. It's important to note that if the insured lives beyond the specified time period, there is no benefit paid out. This makes premiums for term life insurance the most cost-effective form of life insurance.
- Generally for short-term to mid-term obligations
- Generally for a specific time period (e.g., 1 to 15 years) the most cost-effective form of life insurance
Variable universal life insurance
Variable universal life (VUL) insurance is a form of cash-value life insurance which combines some features of universal life insurance (such as premiums and death benefit flexibility) with some features of variable life insurance (investment choices).
The premium amount for variable universal life insurance (VUL) is flexible and may be changed by the consumer as needed, but such changes can result in a change in the coverage amount. The investment feature usually includes "sub-accounts," which function very similarly to mutual funds and can provide exposure to stocks and bonds. This exposure offers the possibility of higher growth over a normal universal life or permanent insurance policy.
Cash value insurance contracts can grow tax deferred. Contracts can be based on guaranteed fixed interest rates or variable rates tied to the performance of underlying investments. Accumulated assets may increase the death benefit value. Because it is a permanent life policy, VUL provides tax-deferred cash value and loan withdrawals - within certain limits - against the cash value. Normally, policy loans are tax free, but you need to confirm this with your insurance advisor because the tax implications may differ from one state to another.
Because you bear the investment risk in these policies, if your investments perform poorly, this may mean that you'll pay higher premiums to sustain the policy. Investment values of variable options will fluctuate so that the investor's units, when redeemed, may be worth more or less than their original cost.
Long-term care insurance
Healthcare can get expensive fast, especially with impairments requiring long-term care. Generally, Medicare doesn't pay for long-term care; it pays only for medically necessary skilled nursing facility or home health care. However, you must meet certain conditions for Medicare to pay for these types of care. You can learn more from Medicare's website, Medicare.gov.
"Long-term care (LTC) insurance helps the insured determine how and where care is received and offers the dignity to control one's own future."
Do not leave the expenses to your family. Rather than rely on government funded care, LTC insurance helps the insured determine how and where care is received and offers the dignity to control one's own future. Relying on children or family members for support can make some individuals uncomfortable. Without this insurance, the cost of providing these services may quickly deplete the savings of the individual and their family. Long-term care insurance can help cover out-of-pocket expenses.
An LTC insurance program designed specifically for you can provide benefits to help cover additional costs of long-term care, which might mean freedom from becoming dependent on a family member or the government.
Do you need it? Consider the following factors when deciding on LTC insurance:
- Your long-term goals (asset preservation, transfer to heirs)
- Wealth preservation
- Leaving an inheritance
- Current cash resources available
- Alternatives to pay for potential LTC costs
- Willingness to sell assets
- Your opinion of government assistance to meet LTC costs
- The opinions and considerations of your family
- Elimination of worry
- Preservation of emotional stability
- Reducing the burden of daily care provided by family members
- Possible effects of inflation
"An auto policy covers a specific vehicle — you are only insured for cars listed in your policy."
Most states require auto insurance, the most common type of insurance policy. Make sure you and your passengers are properly covered. An auto policy covers a specific vehicle - you are only insured for cars listed in your policy. Auto insurance typically includes six basic kinds of coverage:
- Bodily Injury/Liability: Pays others for bodily injury if the damage was your responsibility, and your legal bills. Most states require a minimum liability coverage.
- Collision: Compensates for accident-related damage to your car. Most policies also insure you when you are authorized to drive someone else's vehicle.
- Comprehensive: Pays for nonaccident-related damage to your car (theft, vandalism, fire, weather, etc.).
- Property Damage: Pays for damage to someone else's car or property. It is usually cheaper than bodily injury coverage.
- Medical Payments: Reimburses you and your passengers for accident-related medical expenses, regardless of fault, and coverage if you are hurt as a pedestrian by a car or as a passenger in someone else's vehicle.
- Uninsured Motorist: Pays for hit-and-run drivers or if the at-fault party in an accident was uninsured or underinsured.
Do you need medical coverage if you have health insurance? Your employer's health insurance may cover certain medical expenses, but medical coverage can help cover the costs for a poorly insured passenger.
The auto insurance industry is competitive and policy premiums vary considerably among providers. Evaluate the coverage you need, then get competitive quotes. Ask your agent about available discounts such as:
- Multi-Car/ Multi-Policy
- Anti-Theft Devices
- Safety Features
- Good Driver
- Good Student
- Car Ratings
- Consolidated Policies
"Homeowner’s insurance helps you manage property loss, damage and liability risks."
Your home may be your most valuable asset, so a homeowner's policy is one of the most important types of insurance to own. Homeowner's insurance helps you manage property loss, damage and liability risks.
- Shop for competitive rates
- Qualify for combination policy discounts: homeowner's and automobile
- Carry proper coverage
- Adjust deductibles - do not over-insure
Types of available coverage
A homeowner's insurance policy offers various types of coverage including:
- Dwelling: This is the property shown on the policy declaration page. It covers structures connected to the dwelling or under construction and intended for your own use. Coverage may include detached structures (garages, tool sheds, fences, patios and swimming pools).
- Contents: Part of the standard policy that insures your personal property; usually set as a percentage of your dwelling. It covers appliances, furniture, tools, clothing, etc. Make sure coverage is sufficient to cover a total loss. The policy can pay you the actual cash value or a depreciated value of an item, or you can modify the coverage to pay the replacement cost.
- Personal articles rider: This insures personal property at higher values than the coverage limits under the policy for such items as furs, jewelry, collectibles, etc.
If you submit a claim, you are required to submit proof of loss to the insurance company, which should include the approximate condition and value of the items claimed. Therefore, you should maintain an inventory list or a video of your insured items and keep it in a safe place outside your home.
If using a video, include a picture of the current newspaper in the beginning of the tape with the date clearly visible, as well as an audio declaration stating that the items in the video belong to you.
Policy terms to know
- Loss of use: Provides compensation when your dwelling is uninhabitable or under repair due to loss. It can also pay for loss of income if a portion of your home is rented.
- Liability: Protects from lawsuits due to bodily injury or property damage caused by you or a family member. It also pays for medical expenses related to bodily injuries and actual physical damage to others' properties. Make sure that you set the limit at a level that will protect your net worth.
- Replacement Cost: Insures the actual cost to replace your property. It does not deduct for depreciation. Damage claim would be the amount needed to replace the property using new materials.
- Deductible: This is the out-of-pocket amount a policyholder agrees to pay per claim toward the loss of property.
- Peril: An event that causes loss: e.g., fire, lightning or hail.
- Loss: Personal injury or property damage to you or someone else caused by a covered peril or your negligence.
Is your home fully protected?
To be fully protected, make sure your replacement cost is current. If your home is destroyed, replacement cost will pay for the reconstruction of your home. Another option to consider is the guaranteed replacement cost of your dwelling. It will pay the actual cost to replace your home rather than its fair market value.
Also, keep records of all your insured items so you receive proper reimbursement.
As with all insurance, balance the benefit of coverage with its cost. Only insure what is necessary. A financial advisor can help you develop an insurance plan that suits your needs.
"Sound risk management should include liability insurance which can protect you from lawsuits that may arise"
Personal injury lawsuits have increased dramatically. While homeowners and auto policies include liability insurance, they only protect you up to a certain limit. Therefore, you may need to insure your assets at higher amounts. Sound risk management should include liability insurance which can protect you from lawsuits that may arise from someone falling in your yard, or your dog biting a guest.
An umbrella policy provides liability coverage that starts where your other coverage ends. This coverage takes effect only above certain limits of your casualty insurance, so it is important that your auto and homeowners policies protect you below those limits. Most umbrella policies require a specific minimum in liability coverage on your auto and home insurance policies.
Also, most umbrella policies require that your auto, home and liability policies be held by the same insurance company. It is important that you shop around for the best package rates. You may actually save money by consolidating policies under one company.
"Disability insurance can provide the income you need until you can return to work."
If you become disabled and cannot work for a period of time, would you be able to continue paying your living expenses? Disability insurance can provide the income you need until you can return to work.
Short-term financial needs
Consider how a short-term disruption in income can significantly affect your long-term financial responsibilities. Even a brief period of disability can impact your long-term financial stability if you are not adequately protected. The problem can escalate to a bigger issue, affecting your finances for a long time.
Disability insurance policy basics
Policies vary among insurance companies, but there are four main features of a disability policy that you should know:
- Benefit amount: The amount of income you are protecting. This can be represented as a percentage of your income, or a specific dollar amount.
- Benefit period: The length of time your benefits will pay. This can be set at one, two, or five years, or you can receive benefits until age 65 or for the rest of your life.
- Disability definition: This determines when you are considered disabled. This can be defined as being disabled from your occupation or from any occupation.
- Elimination period: Also referred to as an exclusion period. It is the length of time you must be disabled before benefits begin. This period can be set at 30, 60, 90 days, or as much as one or two years.
Disability insurance can be expensive. Here are some ideas to save money:
- Seek discounted premiums with a policy from your employer or union.
- Choose the proper elimination period - coordinate the elimination period with your sick leave and your available cash reserves.
- Don't overpay. Only insure what is absolutely necessary. Your monthly budget is the amount to insure.