Insurance PlanningInsurance Planning is another one of those confusing topics that a lot of people like to avoid until it is too late. A prudent person will embrace the topic and learn whatever is necessary to protect their interests. One small unprotected financial disaster could wreak havoc with your financial house. Since this site deals with all aspects of your finances, it goes without saying that some protection of your financial house has to be addressed. With propper insurance planning, you get to sleep comfortably at night. Without it, one small calamity could have a domino effect causing your financial house to tumble down. The four cornerstones of Insurance Planning that we are referring to include 1)Life, 2)Homeowners, 3)Health, and 4)Auto Insurance. I will put forth some comments on these four Insurance Planning policies and then we will turn to page two for a discussion on Annuities and other Insurance Planning products that might be appropriate for you depending on your lifestyle and resources. We talked about Annuities under the retirement concepts tab because generally speaking, an Annuity is a retirement instrument insofar as it allows you to put money away for your eventual retirement. It deserves mention here because by definition, an Annuity is an Insurance product. Life InsuranceThe first of the four pillars of Insurance Planning protection you need to consider is Life Insurance. If you have loved ones or anyone in particular that depends on you for support, it would behoove you to get Life Insurance. As life in general has so many twists and turns, no one can predict the future. The last thing that you want to see happen is to have those close and dear to you grieving when you are gone and simultaneously lose any means of financial support.
There are two basic types of Life Insurance policies, that being Term Insurance and Whole Life Insurance, which has several variants. Term is the simplest type of policy which offers protection for a set "Term" such as 5 or 10 years. Some options to look for when buying Term include 1)guaranteed renewability, 2)convertibility to a more permanent policy, and a 3)death benefit which may increase, decrease or stay the same. The best candidate for a Term policy is a person looking for a simple, straightforward means of protecting their beneficiaries for a set period of time, "The Term". If you buy the policy when you are young and healthy, the premiums will be very low as in only a few hundred dollars for $500,000.00 worth of protection. You would want the term to last until some major life event occurs such as when your mortgage is paid off or when your children leave the nest or when your retirement income starts up.
Whole Life Insurance, as it's name implies, covers you for your whole life. It comes in many "flavors" such as 1)single premium whole life, where one lump sum payment covers the whole policy, 2)Interest Sensitive Whole Life which has an incresing death benefit to help cover inflationary costs, 3)Universal Whole Life, a type of policy that includes tax deferred savings as well as a choice of premium plans and 4) Variable Whole Life, a policy that has an investment component tied to the stock market, just to name a few. One common feature in all of these is a build up of cash reserves that you can borrow against should the need arise. If you do not touch the cash value, it is possible to get to the point where this pool of money has built up high enough to cover the premiums for you going forward.
Traditionally, the return on this cash value (as an investment percent) is lower than you could capture using other financial instruments. Because of this, most financial professionals would advise you to keep your insurance planning and your investment planning seperate. In most cases, the prudent course of action would be to "buy Term and invest the rest". The rest represents the amount in premium you would pay for a whole life policy above the premium for a term policy.
Homeowners InsuranceThis second pillar of Insurance Planning protection is addressed by first learning what the replacement cost of your home would be in case of a total loss. This is quite variable from geographic area to area. It is also influenced by the materials in your exact structure and it's features so the more bells and whistles your home has, the more coverage you will need. A typical replacement cost would run from $175.00 to $200.00 per square foot so a 2000 sq.ft. home at $200.00 per sq. ft. would need about $400,000.00 of coverage to ensure adequate replacement coverage.
The next thing you want to become familiar with are the two parts of a typical Homeowners Policy. The first part is the property protection which includes coverage for the actual dwelling, the contents of the home, and the loss of use of the home should you have to live off premises during a repair. The second part covers you for liability in case someone gets hurt on your property. This section also contains medical payments and particulars that go along with the liabilty portion.
As is very typical of the insurance industry, Homeowners Policies, can be had with several endorsements which will increase your coverage over the policy limits. Increasing theft coverage, extended replacement costs and inflation protection are some of those endorsements.
Finally, also understand that a basic policy will have several exclusions for which there will be no coverage. Things like earthquakes, vermin damage, floods, power failures etc. can be addressed with an endorsement if it is appropriate for you to do so. You want to be certain to get enough coverage protection for your home in your neck of the woods!
Health InsuranceAs the saying goes, "If you don't have your health, you don't have anything". This next pillar of Insurance Planning seems to elude so many of us. In 2008, there were nearly 47 million Americans or approximately 20% of the population under age 65 without health insurance. Furthermore, thanks in no small part to the 2008-2009 recession and the resulting job losses that accompanied it, unemployment is hovering around 10% and with that comes the specter of nearly 60 million people without health insurance coverage!
When searching for Health Insurnace, keep in mind that "cheaper" is not always better. There are quite a few variables that go into making up your premium. Things like deductibles, co-pays, your use of network or out-of-network doctors and facilities, all contribute to your final monthly premium. If you are the "healthy" type, you can reduce your expenses by considering a plan with catastrophic coverage. Under this scenario, you would have a high deductible before the insurance kicks in but presumably it won't matter at all because you don't use the system much. If you are willing to withstand a $2,500.00 to $3,000.00 deductible, you could potentially lower your premium by about 50%.
Lowering your premium can also be accomplished by choosing a managed care plan. Deductibles and co-pays will decrease if you are willing to give up choices of doctors and facilities. On the other hand, if you like your freedom, a traditional fee for service a.k.a. an indemnity plan is the right choice for you. Ideally, you need to factor in the benefits that are most important to you while being mindful of costs and restrictions.
Let's not forget about tax breaks that are available for Health Insurance. Those that are self-employed usually can deduct 100% of insurance premium from your pre-tax income. Employees, on the other hand, should check with their employer to see if they offer a Flexible Spending Account (F.S.A.). An F.S.A. allows you to set aside pre-tax income for certain qualifying medical expenses. This has the effect of lowering your taxable income and thus reap the tax break of paying less taxes. Their is no limit on what you can set aside but you need to spend this account in the calendar year or you will forfeit the unspent funds.
Last but not least, if you lose your job, you can generally continue your health care coverage through C.O.B.R.A., (Consolidated Omnibus Budget Reconcilliation Act), for up to 18 months. You would stay on your ex-employers health plan although they are allowed to charge you a small administartion fee (2%).
Auto InsuranceThe fourth pillar of your Insurance Planning foundation, Automobile Liabilty Insurance, is necessary for driving in all 50 States. Without it, you are risking serious penalties and fines. Furthermore, if you are leasing the car or have a loan outstanding on it, your creditor is going to require you to also have collision and comprehensive coverage for other perils such as fire and theft. You might try to lower your premium by reducing policy limits but keep in mind this rule of thumb for good coverage: 100/300/100 which translates to $100,000.00 of coverage per person for bodily injury, $300,000.00 per accident and $100,000.00 of coverage for property damage. Just like other types of insurance, you can add riders or endorsements to increase your coverage for different reasons. While this will tend to increase your premium, you can offset some of it and reduce what you pay by raising your deductible or what comes out of your pocket with each claim.
Finally, if you like to drive new cars or expensive models, you might want to consider obtaining GAP Insurance (guaranteed auto protection). This will cover you for the "gap" between your net loan due and the actual value of the car in the event of a theft or total loss due to some other calamity.
Back To Home Page From Insurance Planning
|
