Certain risks in life, like a flat tire, a furnace breakdown or a transmission failure, can be covered with a good emergency fund. Other risks carry much greater financial impact like a major medical emergency, a tornado or a major auto accident. Risks such as this can wipe out a family financially.
You can help protect your family with appropriate insurance.
As part of our financial plan, we use insurance to help protect us against major financial loss in 4 areas:
- Home and Auto
Health insurance is necessary to protect against major medical issues. One major surgery or long hospital stay will cost many thousands of dollars. Unless you are very wealthy, this type of event could wipe you out financially. Make sure you have adequate health coverage for you and your family. Enough said.
There are two types of insurance that we have which protects our income: term life insurance and long-term disability insurance.
We have term life insurance for both me and my wife with a company independent from my employer. Having a policy through a company other than my employer ensures coverage if I change employment. My policy will provide income replacement so I can still provide for my wife and kids in the event of an untimely death. We worked with our financial advisor to determine how much we needed. Generally, we planned for about ten times our annual income. My wife is a stay-at-home mom, so I was skeptical at first whether she needed life insurance. On further reflection and thinking through the extra costs we would have if my wife preceded me in death, it was absolutely a good idea. With small children still at home and costs like college still looming, I would need some extra funds to help cover added costs.
Unlike life insurance, long-term disability insurance provides an income if I am unable to perform my job or work due to injury or incapacity for an extended period. This provides a fraction of my income (usually between 50-70%), but would more than take care of us considering it is usually not taxed since premiums are often paid with after-tax dollars.
Home and Auto
Homeowners (or renters) insurance is vital to protect against large losses to your home or belongings (e.g., storm damage, theft, flood, sewer back-up, etc.). You may be able to cover some of these expenses with your emergency fund, but they are usually larger than most can afford. The cost of this insurance is usually a bargain, especially if you ever have a large claim for a loss.
Auto insurance is important not only to protect against damage to your car, but to cover you if you are in an accident with someone uninsured. More importantly, it helps cover you if you cause an accident and people are injured or killed. A bad auto accident could wipe you out financially if you are not insured and you injure people or damage property. Additionally, many states require you to carry minimal auto insurance. Play it safe, abide by the law and protect your family.
We keep our costs down on this type of insurance by raising our deductibles as high as we can afford (based on our emergency fund). We also save money by paying annually instead of monthly. Finally, we work with a broker and check our rates every few years to try and keep our costs for quality insurance as low as possible.
In today’s world of constant cyber-attacks and security breaches at major retailers, financial institutions and healthcare providers, it pays to protect the identity of each family member. You can take steps to monitor your credit reports, shred important documents, lock your mailbox and protect your key information, but you may still fall prey to identity theft. If this happens, it could be a major headache and expense to clean up.
For us, identity theft insurance is a key element of getting protection and added peace of mind. We have used LifeLock and IdExperts through Zander Insurance. We have been pleased with the coverage and service offered by Zander Insurance based on the price and terms.
It is better to never use insurance you have than to need insurance you don’t have.
Be sure to get your financial house in order and buy insurance to protect against the risks you cannot cover yourself. As you build wealth and as your family situation changes (kids leave, you become older, etc.) you may find that you can shed some types of insurance like long-term disability or life insurance. You should only do this if you have adequate wealth to self-insure and with advice and guidance from a competent financial advisor. At the same time, you may find you need other types of insurance like long-term care insurance or an umbrella policy.
Other Useful Resources
- 5 Things I Learned About Money From My Family
- Financial Foresight and Disability: Hope for the Best, Be Prepared for the Rest, by Nik Donovic for jayperoni.com
This is a continuation of the series outlining key elements of our financial plan. Check out the other articles:
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