Insurance Planning Is Essential To Your Financial Success

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Learn how Insurance can help you throughout your life and particularly after your home purchase...

Did you know that Insurance Planning is mandatory in many cases and is optional in many other cases?

Below we will discuss mandatory insurance that is required in most states (auto and homeowners—if you have a mortgage homeowners insurance is required by the lender).

We will also discuss other insurance products, that—although are not mandatory should be considered by you and your family either at this time or at a future date when the time warrants it.

First, let’s start at the basic level and discuss exactly what insurance is and what it is intended to provide. 

Insurance products are designed primarily to protect against risks to the person (you), against:

• Premature Death (Life Insurance)

• Catastrophic Illness (Health & Disability Insurance)

• Disability

• Long Term Care

• Liability

• Loss of Property

While the above risks don’t normally happen frequently, they can be devastating when they do.

It is imperative that you have a plan in place to prevent the impacts of such risks. Selecting the right insurance products is a key component of managing your risks. 

Auto Insurance

Choose a company that you are comfortable with and offer affordable rates for your budget situation.

In many cases if your car is paid off and only worth several thousand dollars comprehensive (full coverage) insurance may not be needed and you could possibly see huge savings.

Also consider a company that offers multi-car and/or home and auto insurance discounts. Inquire about defensive driving and other discounts.

Consider raising your deductible if you are able to pay more out of pocket. If you are a retiree you may also be eligible for additional discounts with many insurers.

Home & Flood Insurance

Look for a quality company that you are comfortable with. Be sure you know what your coverage amounts are and your deductibles.

In some areas of the Country and on some policies insurer’s are including percentage deductibles on homeowners policy instead or in addition to the straight deductible. Be sure your policy has the type of deductible you want.

Consider raising your deductible if you are able to pay more out of pocket. If you have recently updated your plumbing and/or electrical systems ask for a discount—it will normally be granted with many insurers.

Use extra caution in the wind and hail section or weather related section as that is where you would normally see the percentage deductible clause.

Be sure you add on necessary riders that are appropriate for your situation!

Also consider a company that offers home and auto policy discounts and fire protection and security system discounts.

If you are a retiree you may also be eligible for additional discounts with many insurers.

Also, keep in mind that if your property values have declined—that does not mean that your insurance needs for your home has also declined.

Your home insurance premiums are tied to the "cost of rebuilding" a home—not its current market  value,therefore do not reduce your insurance without properly evaluating the need to—as that could leave the property under-insured.

It may be worth paying extra for guaranteed replacement or an inflation guard coverage to protect you and your family from higher than expected rebuilding costs.

Also, if you want to ease the claim process take a video recorder or use your cell phone and record or take a picture of your possessions.

You may need to "zoom in" on your valuables such as collectibles, jewelry and the like. Be sure to store the video at another location or in the cloud--such as your safe deposit box or with other family members or friend(s) that you trust.

Do I Need Flood Insurance?

Recently Flood maps have changed so it would be wise to check the latest flood zone maps in your area as well as contacting your home insurance agent to find out if it is appropriate for your home.

Also check with the National Flood Insurance Program to learn more about flood insurance. Also visit www.floodsmart.gov to learn more.

You should also know your local ISO fire district rating—as they have an impact on your homeowner insurance rates. The lower the rating—the lower your insurance premiums. 

Renter’s Insurance

Don’t overlook renter’s insurance if you are currently renting.

Whether it be an apartment, townhouse or residential unit be sure to have insurance on your contents as a burglary or fire could lead to a major financial setback where you would potentially have to use your emergency fund to meet basic living conditions. 

What Is An Umbrella Insurance Policy?

It is an additional policy on top of your home, boat and auto policy that protects you from liability.

Your home, boat, auto and possibly rental home policies are set at certain limits and once you reach those limits your umbrella policy would kick in after your other property and casualty policies have been paid out as a result of claims and lawsuits.

It usually only costs several hundred dollars a year and it could protect you from financial disaster.

If you are a high income earner or have a high net worth an umbrella insurance policy is a must!

If you found yourself in the unfortunate position where you exceeded your policy liability limits as a result of your negligence—you would possibly be forced to “use your own assets” to pay off the difference that was owed that was over the policy limits.

This could potentially affect your emergency fund, investments, retirement savings, college savings and future wages.

With the costs so low it is imperative that you obtain this coverage as soon as you are financially able to do so as many umbrella claims occur that are the result of routine and common auto related accidents.

If you are a business owner or like to entertain often on your property be sure to obtain an umbrella insurance policy as it is a cost effective way to protect you and your family from liability claims and lawsuits that exceed your current liability limits on your home and auto policy.

Even those who are not high income earners or have a high net worth can benefit as policy limits as a result of your liability can climb rather fast in what may appear as a routine accident.

You too should give the umbrella liability policy serious consideration if you are in financial position to do so.

LIFE INSURANCE

Life Insurance is critical for those who are serious about improving their financial position and that of their family.

Even if you are now single life insurance should be taken into consideration by you if you have the means to pay the annual premiums and you are well established in other financial areas of your life.

If you have adequate life insurance you could possibly prevent survivors from having to liquidate assets to pay court costs, taxes, and other outstanding expenses.

Also keep in mind the tax benefit of life insurance—not taxable as income to the recipient.

If you have a cash value policy the interest accumulated on a cash value policy is “tax deferred” until the cash is withdrawn.

If the cash values are never used at the time of death, the cash value accumulations would never be taxed.

Even if you are single it may be appropriate for you to purchase life insurance. 

You can still designate a beneficiary whether it be your parents, other family members or your favorite charity or college.

Although the main breadwinner is normally the one who needs the insurance the most, other family members may need to have life insurance coverage as well.

It is imperative that you protect yourself and your family fromthe financial consequences of an untimely transition.

Your goal with the purchase of life insurance should be to replace your and your family’s income and preserve the assets that you and your family have accumulated.

Options for families after an untimely transition:

• Adjust their standard of living to the new income level

• Other family members can go to work to replace the lost income

• Life Insurance to help during the readjustment (grief) period

How do you desire to leave your family after your transition? 

If you have the means it is imperative that you look at ways of using insurance and estate planning to do more so that after your transition you will have peace!

A life insurance policy provides reassurance that when the insured dies, a certain amount of money will be available to support the surviving spouse and/or dependents.

Be sure to include all of your “dependents” not just your spouse and kids. If you provide support for your parents be sure to include that in your insurance calculations. 

You must also determine how much support you want to provide and for how long.

Questions you must ask yourself are:

1) Do I want to have enough coverage to support my kids until age 18, until they graduate from college, until age 30 or any other goal that you and your family have.

2) Do I want to provide funds to meet specific goals for my dependents such as pay off the house, funding college tuition, funding a retirement plan for kids or purchasing a home for a family member.

3) Do I want to make sure that all that we have accumulated remains with the family.

4) Am I adequately covered health wise and do I know what my lifetime maximum benefit is?

5) Do I have my burial and ceremonial expenses covered?

6) Will my estate have to go through Probate—expenses (court costs, taxes, and other outstanding debt) would possibly be incurred

It is also imperative that you get a thorough physical from your doctor prior to applying for life insurance when you are applying for coverage that requires a medical exam.

If you have high blood pressure, high cholesterol or other medical factors you would be in position to correct those factors prior to applying for life insurance and thereby put yourself in position to obtain the best premium rate possible for the coverage you desire.

Be sure not to skip this step as it could easily save you hundreds to thousands over the life of your insurance coverage.

In Life Insurance there are several approaches that you can take to determine the amount of coverage that you will need—10x Earnings, Needs Approach, Capital Retention, Life Expectancy or Human Life among others…

10X Earnings

In the 10 times earnings you multiply your annual income by 10 and then you purchase coverage in that amount.

It is rather simplistic but could be appropriate for your situation if the coverage amount will meet the intended needs you have for your family.

Let’s say you make $50,000 per year—the amount of coverage you would need for your family would be ($50,000 times 10) $500,000. 

Needs Approach

In this approach needs are analyzed and evaluated and a value is placed on all of the needs.

Let’s say you want to cover your family for an adjustment period after your transition of 2 years, provide life income to your widow(er), maintain or increase your current emergency fund and retirement fund or any other need that would be of concern to you and your family.

You would sum up all of the needs and purchase a life insurance policy that would cover the needs that you outline. If you already had a policy in force you would also subtract that from your sum to give you the policy amount needed.

Capital Retention Approach

If you were to use this approach you would determine the amount of life insurance needed by determining what level of annual income that you wanted to provide for your family.

You would then determine what amount of life insurance would be needed. You would also use existing income producing assets in your calculation and that would give you the desired level of income for your family after your transition.

You would first determine how much you wanted to provide for your family on an annual basis. After that you would basically look at your income producing assets and see what it produced annually, and you would also look at other sources of income such as social security survivor benefits.

Once you come up with the annual amount needed you would then use an adjusted interest rate to reflect inflation and cost of living increases.

This approach is somewhat more complex than the other approaches and may require personal financial statements and projections so a financial planner would possibly be needed if you were to seriously consider this approach.

Human Life Approach

If you were to use this approach you would look at your monetary contributions to your “dependents” and determine your “human life value” equal to your family’s share of your income.

Be aware that human life value is only a financial planning tool and is in no way reflective of your human life value in reality as no price tag can be placed on your human life value to your family.

In this approach you would:

1. Calculate the amount of money that would be available to your family each year of your working life. You would take your (Average Annual Earnings minus Taxes and Self-Maintenance Fees equals Family’s Share of your Earnings)

2. Determine the number of years you will continue to work and generate income. You would take your (Age of Retirement minus Present Age equals Your Number of Years to Retirement)

3. You would then determine the present value of your stream of expected earnings (Family’s Share of your earnings times Present Value of An Annuity Factor, using a reasonable discount rate for the Years to Retirement equals HUMAN LIFE VALUE.

All of the above approaches have strengths and weaknesses, however—you must always realize that any approach is better than—“no approach.”

The point of this discussion is that you and your family need life insurance to prevent financial distress from your loss of income, especially if you have “dependents.”

You must always have at the forefront of your mind that the proper purchasing of life insurance is crucial in your overall financial planning.

Types of Life Insurance That Are Available to you:

Term Insurance

Term Insurance is one of the most popular insurance products on the market. Term Insurance is basically pure insurance as it pays your beneficiary in the case of your (insured) untimely death.

It usually is for a term of years and hence the name “term insurance.” In order for the insurer to have to pay out the insured must die during the term. There is no cash value build up and once the term ends you will have no insurance.

The primary goal of term insurance is to meet temporary insurance needs of your family, therefore it is imperative that you have your own investment plan in place at the time you purchase—and while you are covered as your savings in premiums (term is very low cost) will be offset by the temporary nature of term insurance.

Do not skip this investment step as once the term “ends” you may be in poorer health and unable to renew (uninsurable) and/or will have to renew at higher rates, therefore you want to have a substantial amount saved once your term ends.

The key benefits of term insurance include:

• Affordability

• Maximum coverage per premium dollar

• Will fulfill your temporary insurance need (pay off mortgage, provide for college etc.)

• Can help ensure insurability (must have convertible feature)

Whole Life:

The premiums in whole life (Ordinary Insurance) are fixed, the death benefit is fixed, you do not have control over cash value investments, and the rate of return on your cash value investment is fixed.

Modified Life:

Similar to Whole Life listed above, however the premiums are lower for a certain term—usually 3 to 5 years. The goal of modified life is to make it affordable for you to get whole life insurance (permanent insurance with a death benefit) at a date earlier than you could otherwise afford it. 

Universal Life:

The premiums in Universal Life are variable but subject to a required minimum, the death benefit may increase above the initial face amount—depending on cash value accumulation, you do not have control over cash value investments, and the rate of return on your cash value investment has a minimum guaranteed rate, but may be higher depending on interest rates.

Interest–Sensitive:

Similar in concept to Universal Life listed above, however Interest Portion is more sensitive 

Variable Life:

The premiums in Variable Life are fixed, the death benefit has a guaranteed minimum, BUT can increase if investment experience on cash value is good, you do have complete control over cash value investments, and the rate of return on your cash value investment has a minimum guaranteed rate, but may be higher depending on interest rates.

Keep in mind the fact that all of the insurance products listed above are “whole life” products and all have a fixed or guaranteed minimum death benefit. 

Limitations Of Whole Life Policies:

Often expensive due to the coverage amount that is needed by most families are too high to justify the premiums in their monthly budget.

To get the amount needed they often will have to purchase term insurance for a specified period. If you are unable to afford whole life buying term and investing the difference may be difficult for you as well.

In that case you would buy term and invest what you could afford to invest on a monthly basis.

Due to cost—may provide inadequate coverage for most families. 

Slow cash value growth in the early years due to high fees and Surrender Charges (not renewing the whole life policy) are very high, especially during the first few years of the policy.

If you were to surrender your policy the surrender charge penalties would be deducted from the cash value.

Keep in mind that the major expenses associated with policy issuance is the underwriting costs and agent commissions and they are incurred up front and the surrender charges are an attempt on the part of the insurer to recoup some or all of their costs if the policy was to lapse (you stop making payments or other lapse clauses stated in the policy). 

Closing Thoughts

Be sure you utilize highly rated insurance companies when selecting any and all of your insurance products. You want to be fairly certain that your insurance provider will be there when you need them.

Therefore do your research on the front end to ensure that you are selecting a strong company that will be there when you need them.

For starters you can go to A.M. Best, Duff & Phelps, Moody’s, Standard & Poor, Weiss and other rating sites to learn more about the insurer you are selecting.

A.M. Best Highest Three Ratings: A++ A+ A

Duff & Phelps Highest Three Ratings: AAA AA+ AA

Moody’s Highest Three Ratings: Aaa Aa1 Aa2

S & P Highest Three Ratings: AAA AA+ AA

Weiss Highest Three Ratings: A+ A  A-

The rating companies listed above also have a “lowest three ratings” category as well, however they are not included on this page.

If you are interested in the three lowest ratings of the rating agencies listed above you can go to their web sites above.

Use severe caution when considering any company in the three lowest ratings as the potential for "insufficient funds or future solvency" is a real concern!

Also realize that rating companies can and do make errors in ratings—therefore use your common sense and other rationale in conjunction with the rating data you receive.

Other factors could include:

• how long has the company been in existence

• claim payment history

• lawsuits

•  consumer complaints—and the like.

Be sure to visit consumer and government websites as an additional check.

Remember, it is your money that you are paying for the premiums—therefore, you want to be sure the insurer will be around in the time of need for you and your family.

Be sure to choose an insurer with a solid reputation and below average complaint ratio by going to naic.org and the other insurance rating sites—mentioned above. 

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