When the unexpected strikes, a well-thought-out insurance strategy can be the difference between incurring a financial burden and incurring a minor speed bump on the road of life. Most of us know that we should financially protect certain areas of our lives, but often it is common to find that individuals and families have inadequately covered some areas while over covering others. This insurance primer will discuss the key types of insurance most families and business owners should consider, as well as how often each policy should be reviewed.
Life insurance is available to provide financial support for dependents, loved ones or business associates in the event of an untimely or unexpected death. The two categories – term and permanent – typically serve different purposes.
In the event of premature death, term life insurance can be used to replace a breadwinner’s income. A policy is set for a specific term, typically anywhere between five and 30 years, and at a designated payout amount.
Coverage should be reviewed whenever you experience a major life event, including the birth of a child, the purchase or pay off of a home, divorce or the completion of a child’s education.
Permanent life insurance is commonly used for estate tax planning and business purposes e.g. to pay an estate’s tax obligation or equalize an estate among heirs. It’s best to review estate planning coverage when there’s a substantial change in the insured’s net worth, when they want to restructure their coverage needs upon the birth of a child or when expenses that should be insured against change greatly. In business planning, “key person” coverage is often used to insure a vital staff member like the company CEO, to protect a buy/sell arrangement among members of the business or to incentivize key employees through a deferred compensation arrangement. Coverage should be reviewed whenever there’s a major change to the business.
Long-Term Disability Insurance
While many employers offer short-term disability insurance, it’s often not enough to protect what is most likely your greatest asset – your earning power. The majority of bankruptcies result from an unexpected, expensive medical incident.i
Disability insurance should be reviewed upon a major life event but also when income dramatically rises or when entering a higher risk occupation.
As average life expectancies rise so does the potential for chronic illness and the need for long-term care. For example, the annual cost of a one-bedroom unity in an assisted living facility can average about $40,000 while a semi-private room in a nursing home can run about $75,000.ii Long-term care insurance can help offset those costs, so they don’t erode the value of the estate you plan to leave to your loved ones.
Property and Casualty Insurance
These types of policies cover your homes, automobiles, valuable art and collectibles, as well as the expenses associated with the injury of a guest or serviceperson while on your property. Automobile, homeowners and umbrella policies should not only be reviewed at least every time they come up for renewal but also in the event of a change like a new home, a major renovation, a new car or a new driver in the household. Often a review will uncover duplication or a shortfall of coverage.
When the unforeseen happens, a well-thought-out insurance strategy can be the difference between financial ruin and an unexpected speedbump, whether for yourself, your business associates or your loved ones at home. You should take care to include your insurance strategy as part of your overall financial discussion with your advisor and ensure any necessary gaps are covered.
iMedical Bankruptcy in the United States, 2007: Results of a National Study
Himmelstein, David U. et al.
The American Journal of Medicine, Volume 122, Issue 8, 741 - 746
iiCosts of Care. Retrieved from http://longtermcare.gov/costs-how-to-pay/costs-of-care/