How can one best judge their levels of insurance coverage? Here are some thoughts.
To me, insurance is primarily a method for managing a financial risk.
A financial risk is a situation where the cost of an event is more than you can afford or more than you want to pay. What financial risks do you face?
Typical events include home, car, life, health, and liability. A loss in any of these areas will impose a financial burden on someone. The purpose of insurance is to cover the major share of these costs.
You must figure the financial costs of a person’s death. When someone dies, what are the survivors losing financially? What do they need to sustain their lifestyle? There’s more to consider than just covering the cost of the funeral.
For most, you must create a source of replacement income. Will the replacement income from life insurance come in the form of a lump-sum to live off for a few years? Or do you want to create a pool of wealth that can provide an income stream for life?
Or maybe it’s not about income. Maybe you want to leave enough money to cover the expenses of a wealth transfer to beneficiaries or charities. Depending on the status of estate and inheritance taxes in the future, you may need to leave behind money to pay those taxes to prevent decreased beneficiary amounts.
Health insurance is not complicated for most people, but retired military types have some unique situations that require planning. Most people have health insurance; one policy, period. But retired military have TRICARE Prime or Select, the option for an employer plan in a second career, and the possibility of a retiree plan from our second career. Finally, Medicare and TRICARE For Life emerge at age 65.
The issue is we can have access to multiple health care plans simultaneously. The question that comes up is what can or what should you do? Having too many options can be a pain.
Think about it this way: Would you carry more than one auto policy on your cars? How about your home? No, you wouldn’t. It would be a waste of money to have duplicate coverage. So why would you have more than one health insurance plan?
One health plan is good enough. (I’m talking about major medical plans, not supplemental plans.)
Using Insurance to Manage Savings or Investments
I’m not a fan of insurance for savings or investments. By savings and investment plans, I’m primarily talking about permanent life insurance, universal life plans, or annuities.
I’m not anti-insurance for money issues; I just wouldn’t lead my options with a policy. I consider insurance to be the last resort when more efficient or effective ways of managing money are not available or your money objective can only be met with the use of one of these policies.
Insurance plans to manage money are expensive. You are paying for insurance as a part of the plan. What is the cost of the insurance in your universal life plan, and does it increase over time? How about those annuity costs? The expenses you pay in your investment accounts destroy your returns over time. Expenses matter. Big time.
Do you really need the insurance to accomplish your money mission?
Consider your money objectives. List them. Come up with the most efficient and effective ways to achieve your individual objectives. Each objective has its own strategy for success. Each strategy requires the proper “tools” to reach the objective. “Tools” equate to the appropriate savings or investments.