Financial Foundations #4 - Your Risk Plan
What is risk planning?
Risk planning is all about protecting your financial life from unexpected events that could totally derail your financial situation and goals. Its purpose is to identify those threats and use insurance to transfer the risk away from you and onto the insurer.
Why do you need it?
Everyone has a limited amount of financial assets and income earning potential. You can have the most well crafted financial plan known to man, but it could all come crashing down with a single crisis that wipes you financially. Insurance comes into play during a covered disaster in your financial life to provide a safety net so you can continue pursuing your goals without losing everything to stay afloat.
What type of insurance should you consider?
There are a variety of insurance policies you should consider to build a strong foundation and confidence in your financial plan. It’s imperative that you understand how each of your policies work and what they cover as they are all so different. Additionally, cheaper insurance doesn’t always mean it’s better insurance.
Life Insurance - this is designed to pay out upon your passing. Typically, you would want to have enough to replace your income for those that depend on it for a certain period of time and potentially fund any goals you may have for the future. It’s best to get this earlier in life as there are situations that could occur and make you uninsurable later in life. You can obtain this in a few ways:
Group - this type of policy is purchased through your employer. They may give you a certain amount at no cost, then you can purchase additional amounts. Typically the additional amounts you purchase are relatively inexpensive. However, if you leave your employer you may have to convert it to a whole life policy if you want to keep it, and that can be extremely expensive. It’s best to take advantage of this where you can, but rarely is it good to be your sole source of coverage.
Term - this type of insurance is designed to get a certain coverage amount for a certain number of years. You can always layer in additional policies to increase the amount and coverage you have at any point in time. This policy is cheaper compared to whole life.
Whole/Permanent - this type of insurance is designed to be in place as long as you’re alive and you pay your premiums. It can, over time, build a cash value within the policy that you can use during life if necessary. These policies are often more expensive than term. While we typically steer clients away from them, there are certain scenarios where it makes a lot of sense to use these kinds of policies.
Health - Most people are familiar with health insurance as they use it frequently. Where we like to dig in a bit deeper is if you have multiple options available, examining deductible choices and determining which one may make the most sense for your situation and potentially tax bill. This also comes into play when deciding on Medicare for part C or Medigap, and part D. Understanding how much money you can be out in a given year can help you prepare for possible issues ahead.
Disability - this type of insurance protects you during a period of time you are unable to work and earn an income - which is paramount to meeting your financial goals! There are different kinds of protection offered by insuring your ability to do your specific line of work or it could be any work. It’s important to know which you have, especially in a technical kind of job. Then you have two different types regarding the length of time the policy pays out and usually it’s around 60% of your income.
Short-term - This type of policy kicks in typically between 7 and 14 days after a covered disability and lasts 30 days to 180 days. It stops paying at the end of that period.
Long-term - this type of policy usually picks up where your short term disability policy stopped. It often starts between 30 and 180 days after a covered disability and typically lasts until you’re around age 65.
Home - If you own a home, you need to have homeowners insurance. This is typically the largest asset you own and most can’t afford to replace it easily. While there are a variety of coverage types you should consider, you should know your coverage amounts, if you have a replacement or actual cash value policy, and know your deductibles.
Renters - If you rent, your personal belongings are not covered in the event of a disaster. You can insurance your personal belongings while you rent so you can replace them if there is a broken pipe flood, fire, theft, etc (make sure you understand what disasters are covered by your policy). The cost to do this is usually very inexpensive and well worth it.
Auto - When you’re driving, you have the risk of damaging property and injuring someone else. You can insure that side of risk with a liability only policy. You can cover the risk of you doing something to your vehicle or something happening to it outside of another driver by having comprehensive coverage. Additionally, some states require uninsured motorists insurance which protects you if someone makes a foolish decision to not carry auto insurance (about 1 in 7 drivers in Texas are uninsured…).
Umbrella - Umbrella insurance provides an extra layer of liability protection over and above your existing home, auto, and sometimes other insurance policies. This type of policy kicks in when your underlying liability limits are exhausted—protecting your assets and future income in case of major claims or lawsuits. For example, if you are found liable for an accident and the damages exceed your auto policy’s liability limit, your umbrella policy would cover the additional costs up to its own limit. Umbrella insurance is generally fairly affordable and is especially important as your net worth grows, or if you have higher liability risks (such as owning a pool, rental property, or being a public figure). It’s a cost-effective way to safeguard your financial well-being against unpredictable, high-severity events.
Long-term care - Long-term care insurance is designed to cover the costs associated with extended care needs due to chronic illness, disability, or cognitive impairment care that is typically not covered by health insurance, Medicare, or disability insurance. This coverage helps pay for assistance with activities of daily living, such as bathing, dressing, or eating, whether provided at home, in an assisted living facility, or in a nursing home. The cost of long-term care can be substantial and is often one of the most underestimated parts of retirement planning. Some people can self insurance through the assets they’ve accumulated over their life. Some need to purchase insurance. Purchasing coverage earlier in life can result in lower premiums and ensure you’re protected if your health changes later on. It’s important to carefully review policy features, benefit periods, elimination periods, and inflation protection when considering long-term care insurance. This type of policy can help preserve your savings and reduce the financial and emotional burden on your loved ones.
How do you get it done?
In your working years, you typically utilize your open enrollment periods for many of the insurance types that are often offered through your employer such as group, disability, and health insurance. From there, you may have a property and casualty insurance agent for your renters/home, auto, and umbrella. And then life and long-term care can be obtained from a variety of insurance carriers. For Medicare, we recommend working with an agent that specializes in this field.
How often should you review it?
Any major life change should have you revisit these policies. If you’re still working, review your available coverage options each annual open enrollment period. For Medicare part D, we advise to review that annually due to the change in coverage of prescription drugs from one year to the next. For the rest, every 2 years is typically a good cadence to make sure you’re getting the best coverage at an affordable price.
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