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Always Be Prepared
Insuring against possible disaster can
save you money in the long term.
By former Army Capt. Phil Dyer, CFP, Deputy Director, Benefits Information
This month, the “Financial Planning
101” series takes a look at risk management and insurance— both
critical components of a comprehensive financial plan.
Ticker
Tape
Although it’s good to prepare for
future catastrophe, you should avoid some insurances. Steer
clear of these high-cost, low-value policies:
In simplest terms, insurance and risk management boil down to “What
can you afford to lose?” Life, health, auto and homeowner’s,
disability, and long term care insurances all are designed to
protect against catastrophic loss you can’t afford to cover
out-of-pocket. Let’s examine basic coverage everyone should
consider.
Life insurance. Can your
family meet all its financial obligations if you die prematurely?
Life insurance protects your financial dependents and comes in two
forms: term and permanent/cash value. Term is pure protection—your
life is covered for a certain dollar amount (face value) for a
certain time period (term). Permanent insurance combines a term
insurance policy with a savings/investment component that ideally
builds cash value over time.
When you are younger, term provides much more bang for the insurance
buck, typically buying five to six times more insurance for the same
insurance dollar than a permanent policy. However, term insurance
gets more expensive as you age and usually is too costly to renew
once you reach age 65. A general rule is to seek coverage equal to
five to eight times your annual income.
Health insurance. Can you
afford to be sick if you don’t have health care coverage? Most
Americans get insurance through their employers or through
government programs. Traditionally, employers have paid the majority
of costs, but escalating premiums are forcing more of them to pass
costs to employees or consider dropping plans altogether. Many of
the estimated 44 million Americans without health insurance either
work for small employers who don’t offer plans or choose not to
elect coverage because of the cost. Fortunately, new initiatives
such as health care savings accounts offer opportunities for
employers and employees alike.
Disability insurance. What if
you are injured or suffer a long-term illness and can’t work?
Disability insurance pays a monthly benefit if you are unable to
work. Before reaching age 60, people are more likely to become
disabled than to die in a given year, yet many people ignore
disability insurance. This can be a costly mistake, particularly for
younger workers who don’t have many assets. Many experts recommend
minimum disability coverage of 60 percent of your annual income, but
70 percent to 80 percent might be more beneficial.
Auto and homeowner’s insurance. What if a tree falls on your house
or car? Most people wouldn’t dream of going without auto or
homeowner’s insurance, even though it can be pricey. One way to
reduce costs is to increase your annual deductible to at least $500
on auto policies and $1,000 on homeowner’s policies. If you have
substantial assets, consider an umbrella liability policy. This
inexpensive policy (usually about $150 annually for $1 million of
liability coverage) provides excess coverage for both your auto and
homeowner’s policies.
Long term care (LTC) insurance. Will long term care costs wipe out
your nest egg? LTC insurance is designed to help protect your assets
in case you need nursing home or in-home care. It can be expensive
and still is not well understood by many consumers but can be
invaluable in protecting and preserving your wealth.
Be sure to review your insurance coverage and risk-management plan
to make sure you have covered losses you can’t afford to take.
Next month, the “Financial Planning 101” series will tackle how to
save for college expenses.
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