SIMPLE Personal Finances
Limiting Your Financial Risk through 9 Different Insurance Products
L Stands for Limit
I may not be an adrenalin junkie, but I have pulled some pretty darn stupid stunts in my life that I sometimes marvel I survived. And they started early on. Family gatherings rarely pass without my mother telling the story of my attempt to jump my BMX bike using a ramp leaning against our picnic table benches when I was 8 or 9 years old. Then there was the 15-foot fall from the eucalyptus tree branch where I was hammering in a “tree ladder” at age 10 or 11. Later, there were many poor choices I made behind the wheel that are too scary for me to share (or confess to) even as a fairly responsible adult. As a college student, I thought it would be “cool” to take a selfie (long before smartphones came along) from the top of the local mountain peak at sunrise. The only problem was that a blizzard blew in about two hours before I started the 3-mile long, 3,000 vertical foot hike, and I had not told anyone where I was going. I still went, but my cheeks were so red and my eyes so glossy that I rarely showed the photos to anyone.
Amazingly, I never broke a bone or required hospitalization for such foolhardiness. But it cannot be denied that I risked a great deal. Everyone does. Everyday. One of the great rules of financial success is the relationship between risk and reward. High school football coaches everywhere remind us of this rule all the time: “no pain no gain.”
Was I aware that it was risky to climb trees as a child? Of course, but the reward of having a tree fort 10 feet above the roofline was more than I could resist. Did I know it was risky to climb a mountain in a blizzard? Certainly, but I was going to do it anyway.
Everyone takes risks regularly, from driving a car to investing in mutual funds to buying a home to even taking your kids to the neighborhood park. Risk is all around. If you tried to avoid risk at all costs, you risk missing out on a little thing called living.
So, what can you do to minimize the potentially negative consequences of risk? Although it is called, “Risk Management,” most know it as “insurance.” Insurance policies limit your potential financial risks in the areas of health, death, transportation, home ownership, business, property rental, injury and disability, job loss, and much more.
“L” is for Limiting your liability.
What types and how much insurance coverage, though, are enough? There is no one correct answer for all of us. Some might need years of life insurance coverage if they have young children. Others may have no dependents and not need any life insurance. Some may need full vehicle coverage while others only need liability. Consider the following as incomplete guidelines, not as comprehensive hard and fast rules. The best advice is to speak with an insurance agent you trust.
I wish I had a magic bullet to help figure out this country’s health insurance crisis. Just this morning, I attended a meeting where an economist said he was glad that, as a society, we can afford to pay 20% of our gross domestic product in medical-related expenses because it shows how well off we are. I will respectfully disagree. When annual premiums regularly increase at double-digit rates while income is stuck around 2%, sustainability is impossible.
That said, health insurance is still a requirement per the Affordable Care Act. I dove into some interesting statistics last month that clearly showed that not all health insurance is equally helpful. Households that only have high deductible health care policies, sometimes known as major medical coverage, are at a clear financial disadvantage to everyone else. This includes households that have lower deductibles (which makes sense) as well as low-income households that have only Medicare coverage.
The takeaway? Policies with lower deductibles, even though they have higher premiums, provide better financial risk management than major medical policies with lower monthly premiums.
If you have no dependents, a small “end of life” life policy may be sufficient to cover burial expenses
If you have dependents, the rule of thumb is to multiply your income by 10 and get that much coverage. However, if your dependents are nearly adults or will not otherwise depend upon your income much longer, this amount of coverage is likely too much. Additionally, make sure that your life insurance coverage would pay off your debt, your mortgage and cover your funeral expenses.
Some suggest the rule of thumb of multiplying your income by 10 and then adding $100,000 of coverage per child for college expenses. Ouch! If you can afford such coverage, that is your choice. Otherwise, keep in mind that your child can still succeed in virtually any profession without attending four years of the most expensive university in your state.
While death by injury or terminal illness often create the greatest concern when it comes to financial risks (see Life Insurance above), becoming disabled is far more common during our working years than death. In case of disability, you may qualify for government assistance, but it is both limited and limiting. Having a separate short- and/or long-term disability insurance policy will go a long way to taking care of you, your dependents, and your financial obligations should you lose your ability to earn an income.
Liability coverage, of course, is a requirement in every state. The minimums are just that: minimums. You can, and often should, consider higher coverage. Be aware that if you only have liability coverage and you cause an accident, your insurance company will not replace your vehicle.
If you have a collision policy as well, the general rule of thumbs is to reconsider the coverage if the monthly premium exceeds 10% to 25% of your vehicle’s value (the range takes into consideration the variation in individuals’ aversion to risk). Without such coverage, it will be critical to have money in a savings account for replacing your current car should anything happen to it. After all, cars ALWAYS break down eventually or require significant repairs and upkeep.
The principle: having no insurance is financially risky while having too much coverage might tie up scarce resources you could use elsewhere.
If the value of your home has increased significantly since you first acquired homeowners insurance, it is a good idea to talk to your insurance company about your policy. If something were to happen to your home, will your policy be sufficient to cover the rebuilding of your home, or is it capped at your home’s previous value?
Inventory your personal property. I do this every year on New Year’s morning when it tends to be fairly quiet around the home. Take photos or video of your entire home, including possessions hanging in closets, sitting in drawers, and lurking in your garage. Save these photos and videos electronically in the cloud where you can access them easily in case of fire, flood, theft, etc.
Do you know how much cash and possessions your policy will replace in case of fire, flood or other total loss? If you keep a lot of cash in your home, ask your agent if you are covered.
I believe renters insurance for those living in apartments or renting their home is just about the most affordable insurance policy you are going to find. For less than a week’s worth of latté at the local gourmet coffee shop, you can find coverage for most all of your possessions, including appliances, furniture, clothing, shoes, and even items in your car in the parking lot. Do not expect your property owner’s insurance to cover your personal possessions in case of fire, flood, or theft. Their insurance usually covers only the structure and personal injury.
Most vacationers are willing to risk the loss of their favorite suitcase, clothing and other belongings rather than pay an additional 4% to 8% for travel insurance. Besides the fact that there are plenty of stipulations and requirements for submitting a claim for lost luggage, have you thought about what would happen if you got sick and needed to visit the doctor, have surgery or be transported by ambulance while away from home or even abroad?
Most health insurance policies will not be of much, if any, help to you in such cases. And while some credit cards may provide or offer travel insurance to facilitate refunds in case of ticket cancellation, they do not cover medical expenses while traveling.
In a world where many treat Fifi, Fido and Fluffy, as well as others, treat their own children, pet insurance has become a popular option for pet owners. Most owners might struggle to afford hip surgery for their Akita or kidney stone surgery for their Burmese, but many will still pony up thousands of dollars for such operations.
Pet insurance can help offset a large portion of these expenses, though not all. Check first with your employer. Many Employer Assistance Programs (known as EAPs) offer discounts on pet insurance.
If you choose not to have pet insurance, make sure to have the discussion ahead of time with your spouse, partner and possibly even your children about possible outcomes should your pet become terminally ill or be seriously injured.
Business and Professional Insurance
Do you run a business out of your home? One option to mitigate risk might be to get a rider (specific additional coverage) to your homeowner’s policy for possible damages related to your business activity (such as running a daycare out of your home).
Other insurance might include Errors and Omissions coverage, known as E&O, for consultants, coaches, counselors, wedding planners, etc. This type of insurance is called professional liability coverage for attorneys, accountants, architects, and engineers, while medical professionals know it as malpractice insurance.
Whatever your professional or business, be sure to understand the financial risks you run as an owner and professional, and to read any proposed policy carefully. No standard E&O coverage should be acceptable, because your business is different from everybody else’s.
Life is full of risks, no question. And no one likes paying insurance premiums. Think about it. It is probably the only expense you pay regularly that you actually HOPE you never use. It can feel like you are just throwing money out the door.
Still, insurance is critical to your financial stability. Getting insurance answers off the web has become easier and easier. However, knowing which questions to ask in the first place often still requires the human touch. It is recommended that you meet with your insurance agent (locally or by phone) each year or two to discuss life changes and how they affect your financial risks. Work with a trusted agent who will not automatically upsell you additional coverage. Don’t necessarily upgrade your policy unless you completely understand why your agent is recommending the change and you are in complete agreement. Think about changes in employment, family size, home mortgage, age and value of vehicles, the size of your savings, etc. Each change affects whether you should have more or less insurance, whether health, life, auto, or otherwise.
Finally, when the unexpected does happen, whether in the form of an accident or a lawsuit, a theft or a flood, you will likely face frustration and possibly even despair. However, realizing that you have an insurance policy that covers your financial loss can produce such relief that you might experience an actual adrenalin rush yourself. An adrenalin rush with insurance? Great, but I still hope I never need one.