Insurance Recommendations

What is insurance?

As defined by Merriam-Webster, insurance is coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril.

 Why do I need insurance?

Insurance is an important component of your financial plan. Think of insurance as transferring risk to a third party. The more you pay (premium amount) the less you will pay when a financial event occurs (death, car crash, broken arm, etc). Regardless of which baby step you are on, having proper insurance in place can ensure that you will be continuing to build wealth and avoid a financial disaster such as bankruptcy.

Life insurance:

Life insurance is not just for people over 50, it is for everyone! The Insurance Information Institute reports that almost one third of Americans carry no life insurance. How would your loved one or spouse pay for shelter, clothing, bills and food if something should happen to you? Having life insurance in place will ensure that your family is taken care of if the worst case scenario should happen. As a financial coach, this is one insurance that I emphasis for individuals to purchase. 

Life insurance comes in two basic forms; whole life and term. Whole life stays in effect for life, whereas term stays in effect for a certain time period (i.e. 20 years). Whole life acts as an investment vehicle, whereas term is solely insurance. Personally, I recommend term as I like to keep insurance and investments separate. Life insurance is simply meant to provide security, protection and peace of mind. Everyone with dependents needs a policy - even stay at home parents.

Recommendation: Term life insurance, 10-12 times your annual income.

Home insurance:

Homeowner's insurance repairs or replaces a home and its contents when a covered accident occurs. It is required with every mortgage and protects both the homeowner and the lender. Be sure your homeowners policy includes extended dwelling coverage. Extended dwelling coverage adds an extra layer of protection above your policy limits.  With extended dwelling coverage, the insurance company will replace or rebuild your property even if the cost exceeds your policy’s coverage. There is a limit to how much they’ll pay, however—usually 20–25% above the amount you’re insured for unless you opt for more coverage. Always take higher liability limits on your home policy, it’s inexpensive and provides protection against lawsuits that can wipe you out.

 Recommendation: Extended dwelling coverage.

Auto insurance:

It is illegal to drive without auto insurance. It is important to carry adequate liability coverage, while collision might be dropped (especially on older cars). You can sometimes save money by combining home and auto insurance. It is worth shopping around once a year to ensure you have the lowest price.

Recommendation: $100,000 for bodily injury per person; $300,000 for bodily injury per accident; $100,000 for property insurance

Health insurance:

This is commonly offered through your employer. Be sure to compare the plan options and which providers fall in the respective networks. Pay attention to the premium, deductible amount, co-insurance percentage and maximum out of pocket expense. The premium is the amount that will be deducted from each paycheck. The deductible is amount you will have to pay before your insurance plan starts to pay (i.e. a $2,000 deductible, you pay the first $2,000 of covered services yourself, then your co-insurance will begin). Co-insurance percentage is the amount you will pay for medical expenses until you reach your maximum out of pocket expense (i.e. Let's say your co-insurance percentage is 80/20, after your deductible is met, you receive a $500 bill for a trip to the ER, you will have to pay $100). The maximum out of pocket expense is the most you will have to pay for covered services in that plan year. After you spend this amount on deductibles, copayments, and coinsurance, your health plan pays 100% of the costs of covered benefits. The out-of-pocket limit doesn't include your monthly premiums.

If you have the option to fund a HSA (Health Savings Account) through your employer this is a great way to save tax-free for medical expenses. This accounts do not have time restrictions like FSA's either. 

Recommendation: Consider the deductible and maximum out of pocket based on your current situation. Fund a HSA.

Disability insurance:

This type of insurance is designed to replace income lost due to long-term or permanent disability. If you can buy long-term disability insurance alongside your employers health plan, it is much cheaper than looking on the open market.

Recommendation: A policy that covers 65% of your income.

Ray Robertson