Am I Adequately Insured?
One of the more common questions we receive from clients is, “Am I adequately insured?” Because each of us has unique circumstances, there is no cookie cutter answer to this question. But for most people, insurance premiums can represent a significant expense and therefore this decision requires thoughtful consideration along with professional advice and counsel.
Why Do We Need Insurance?
We buy insurance policies to mitigate risk of loss that can have adverse and possibly catastrophic financial consequences. When we discuss insurance with our clients, we start with a conversation about their protection needs followed by an insurance audit. We list all their coverages and examine the results to look for possible gaps.
Health Insurance
Let’s start with the most important and probably the biggest insurance expense many of us face—health insurance. If you work for a large company, there is a good chance that at least part of your insurance premiums is subsidized by your employer.
If you are self-employed or own a company, your personal insurance cost can be significantly higher. We have seen a trend over the past decade to higher deductible major medical plans coupled with a Health Savings Account, or HSA. The benefit is typically a lower premium and a tax-advantaged savings account that can be used to pay for your out-of-pocket expenses such as deductibles and prescriptions. And of course, you want your health insurance to provide high-limit catastrophic coverage for an unforeseen medical situation that could wipe you out financially.
Disability Income and Long-Term Care Insurance
Disability income and long-term care are two other types of insurance for consideration. Disability replaces a portion of your income if you become sick or injured and are no longer able to work at your occupation. Long-term care protects you if there is a need for either home health or nursing home care. The average cost of nursing home care is extremely high and can cost more than $10,000 per month. At that burn rate, the cost can quickly deplete your financial assets over the course of a long stay.
Automobile Insurance
The next common coverage, which is required by law in most states, is automobile insurance. Most people naturally think of insuring for the damage their car incurs in an accident. But the most important aspect of auto insurance is to cover your exposure to financial loss if you injure another person or damage their property. You need to make sure that you have adequate liability limits to protect against lawsuits.
You can get additional coverage by purchasing an umbrella liability policy, which provides liability coverage above and beyond the limits provided by your other insurance policies.
Homeowner’s and Renter’s Insurance
If you own a home, you need to have a homeowner’s policy, and if you rent, you need the coverage of a renter’s policy. These policies are designed to pay for any property damage that could occur, such as from a fire, and liability coverage to pay for the cost of an injury associated with your property. We recommend you buy a replacement cost policy for damage to your home, and adequate liability coverage in case someone slips and falls or is bitten by your dog. These types of events happen frequently so you need to protect yourself.
Life Insurance
Life insurance is the most common type of policy, yet it’s probably the most difficult to understand. You need to buy life insurance only if someone other than yourself relies on your income. It could be a spouse, a child, or a business partner. To determine the right amount of life insurance to buy, we start by asking: If you were to pass away tomorrow, who and what would be affected by your untimely death?
For a family with children, the loss of income might mean you need enough insurance to replace your income, pay off debts, and fund college. A good advisor will help you determine how much coverage you need. For most of our clients, inexpensive level-term insurance for a specific time period is usually a good start. This is not a one-size-fits-all recommendation, and other types of policies can be considered. The most important part of selecting a life insurance policy is to secure the appropriate death benefit amount.
Am I Adequately Insured? Takeaway
We recommend that you dedicate adequate time each year to review your needs and each of your coverages, looking at both levels of protection and costs. Having a well-coordinated insurance program can give you peace of mind and help you to sleep better at night.
This is intended for informational purposes only and should not be construed as personalized financial advice. Please consult your financial professional regarding your unique circumstances.
David J. Huber
Financial Advisor / Managing Director
CFP®