L Stands for Limit
SIMPLE Personal Finance Series
L Stands for Limiting your financial risk through 9 different insurance products
Even if you are not an adrenaline junkie, you have likely tried to pull some pretty darn ill-advised stunts in your life. You may even be surprised that you survived some of them. Everyone takes risks regularly, from driving a car to investing in mutual funds to buying a home and even to 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.
One of the great rules of financial success is the relationship between risk and reward. However, can you minimize the potentially negative consequences of risk? Absolutely. Although the proper term is, “Risk Management,” most know it simply as, “insurance.” Nine of the most common forms of insurance policies include:
Business and Professional 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.
As part of SIMPLE finances, the “L” stands for “Limiting your liability.”
What types and how much insurance coverage, though, should you have? There is no one correct answer for all of us. Some might need years of life insurance coverage if they have young children. Others with no dependents and some savings to take care of their own funeral expenses may not need any life insurance at all.
If you have a car payment, you are required to carry full vehicle coverage, whereas others may only need liability.
Consider the following as educational (and incomplete) guidelines to risk management, not as comprehensive hard and fast rules. The best advice is to speak with an insurance agent you trust.
No magic wand exists to help figure out this country’s health insurance crisis. Apparently, 20% of America’s gross domestic product relates to healthcare. Unfortunately, when annual premiums regularly increase at double-digit rates while income is stuck around 2%, sustainability is impossible.
Still, health insurance coverage is currently a requirement per the Affordable Care Act. Unfortunately, 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, you may not need life insurance. Either a modest savings account or a small “end of life” life policy may be sufficient to cover funeral and burial expenses.
Otherwise, 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. 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. You, on the other hand, cannot borrow money to on during retirement.
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 for drivers is, of course, a requirement in every state. Each state sets minimum liability coverage levels, but they 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 the damage you cause exceeds your liability coverage, you can be on the hook to cover the rest.
If you have a collision policy as well, the general rule of thumb 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 sufficient savings for replacing your current car should anything happen to it. After all, even without accidents, ALL cars eventually break down 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 homeowner's 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 sufficiently cover your home rebuild, or is it capped at your home’s original value?
Take inventory of your personal property every year. Consider taking 20 minutes on New Year’s Day morning, when things tend to be fairly quiet around the home, to 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 (e.g. Google Drive, Dropbox, OneDrive, etc.) 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 how much of it would be covered.
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 latte at the local gourmet coffee shop, you can typically 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. His or her 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 provide little, if any, help to you in such cases, especially if you are traveling abroad. Additionally, 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. Contact your insurance agent for details.
In a world where many pet owners treat their Fifis, Fidos and Fluffies, as well as others treat their own children, pet insurance has become a popular option to hold on to our four-legged companions as long as possible. 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 experience a serious injury.
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. Attorneys, accountants, architects, and engineers know this type of insurance by a different name: professional liability coverage. Medical professionals call it malpractice insurance.
Whatever your profession 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 differs from other businesses.
Life is full of risks, no question, and no one enjoys paying insurance premiums. Think about it. It is probably the only expense you regularly pay 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. While the web has made it easier to get answers to your insurance questions, knowing which questions to ask in the first place often still requires the human touch. Consider meeting 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. Do not necessarily upgrade your policy unless you completely understand why your agent is recommending the change and you are in complete agreement. Consider changes in your 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 a feeling of such relief that you might think it is an actual adrenaline rush. An adrenaline rush with insurance? Now that would be a welcome surprise.