It isn't how much you make
. . .It's how much you keep!
Archive for Insurance
Document courtesy of Mark Zinder
Mark Zinder - Necessary FormsFew people enjoy thinking about their insurance needs, shopping for coverage, or
reading through a policy’s fine print. Once they do buy a policy, many people rarely think about it again, other than when they pay the premiums. But that tendency to avoid thinking about insurance can lead to insurance mistakes that can put a person’s assets at risk. Below are some of the most common
insurance mistakes:
Expecting the best — Some people may think they can skip various types of essential insurance (like auto or health insurance) because it won’t happen to them. Or they may buy a bare-bones policy thinking they won’t ever need to make a claim. But the reality is that accidents and injuries can happen to anyone. A comprehensive insurance plan protects you when they do.
Not shopping around — If you’re in the market for a new policy, shop around and compare prices to get the best deal. But make sure you’re comparing equivalent policies and coverage — an ultra-cheap policy may offer skimpy benefits.
Buying too much insurance — While insurance is a valuable part of your overall financial plan, there is such a thing as being over-insured. If you’re paying
high premiums for insurance coverage you don’t really need, you’re wasting money. What types of insurance might you skip? Extended warranties, cell phone insurance, insurance for specific diseases (like cancer), rental car insurance, and mortgage life insurance are usually not worth the premium you pay.
Not negotiating on insurance rates — Here’s a little-known tip: The premium price you’re quoted isn’t set in stone. Depending on the type of coverage you need, you may be able to get discounts based on your profession, the age of your car, installing an alarm system in your home, choosing a higher deductible, and more. Bundling — buying several policies through the same carrier — can also lead to premium price breaks.
Forgetting to pay the premium — It’s a simple but potentially devastating mistake. Missing premium payments could cause your policy to lapse, leaving you without coverage. Reduce the risk of this happening by automating your payments.
Dropping coverage to save money — When your budget is tight, dropping insurance coverage may seem like a good way to save cash. You may save money in the short term, but you could end up worse off in the long term if you need to make a claim. If premium payments are straining your budget, consider raising your deductible or asking your insurer if you’re eligible for any discounts.
Forgetting to update life insurance beneficiaries — As your life changes, so should the people named as beneficiaries on your life insurance policy. Divorce, remarriage, the death of a spouse, or the birth or death of a child are all times when you should update these designations. If you fail to take this simple step, your life insurance may not do its job when you need it most. After all, do you
want your insurance benefits to go to your ex-spouse or have one child receive a generous insurance payment while the other receives nothing? Keeping your beneficiary designations up-to-date can help you avoid those outcomes.
Having coverage gaps — Everyone faces different risks, and thus has different insurance needs. Sometimes, it’s easy to overlook a risk until it’s too late. For example, if you live in an earthquake-prone area, you likely need separate earthquake insurance. If you serve on a nonprofit board of directors, you may need personal liability coverage. If you own ATVs, snowmobiles, or other vehicles, you may need special policies to protect yourself in case of damage to the vehicle or a lawsuit. The list of possible risks goes on and on.
Not researching an insurance company before you buy — Not every insurance company is created equal, and what looks like a great deal today may be less appealing tomorrow when you are struggling to get a claim processed quickly. Before you buy, get multiple quotes, read the policy’s fine print, review the insurer’s complaint record with the state department of insurance, and check the company’s ratings with ratings agencies like Fitch, Moody’s, and A.M. Best.
Not thinking about insurance as part of your overall financial plan — Insurance isn’t something you should think about in isolation. In fact, it’s an essential part of your overall financial plan. A solid risk management strategy protects your hard-earned wealth and your family’s future.
Please call if you’d like to discuss insurance in more detail.
Rules of thumb are designed to provide quick guidelines for your finances. However, you shouldn’t blindly follow them without giving
thought to your personal circumstances. Some of the more common
rules of thumb include:
Save 10% of your gross income. While this will give you a good start, it’s typically the minimum, not the maximum, you should be saving. Analyze how much you’ll need for your financial goals, and then work backwards to calculate how much you should be saving.
Plan on spending 80% of your pre-retirement income during retirement. This may be true if you don’t plan to be very active during retirement, but more and more people expect retirement to include extensive travel and expensive hobbies. On the other hand, if you’ve paid off your mortgage and your children have finished college, you may need less
than this. Review your individual situation to determine how much
you’ll need.
Set the percentage of stocks in your portfolio to 100 minus your age. With increased life expectancies, this can result in a portfolio that is too heavily weighted in income investments. Set your asset allocation based on your risk tolerance and time horizon for investing. Stocks should be considered for long-term financial goals of 10 years or more.
Keep three to six months of income in an emergency fund. While an emergency fund is a good idea, how much you keep in that fund will depend on your circumstances. You may need a larger fund if you are the sole wage earner in the family, work at a seasonal job, own your own business, or rely on commissions or bonuses.
A smaller fund may be required if you have more than one source of
income, can borrow significant sums quickly, or carry insurance to
cover many emergencies.
Pay no more than 20% of your take-home pay toward short-term debt. Once considered a firm rule by lenders, you may now be able to obtain loans even if you exceed this amount. Try to reduce your debt or at least reduce the interest rates on your debt.
Keep your mortgage or rent payment to no more than 30% of your gross income. While you can obtain a mortgage for more than that, staying within this rule will help ensure you have money to devote to other financial goals.
Refinance your mortgage if interest rates decline by 2%. This rule of thumb assumes you’ll pay significant refinancing costs, including points, title insurance, appraisal fees, and other fees. However, many lenders now offer refinancing deals with significantly lower costs. Thus, you should assess whether it makes sense to refinance when mortgage rates decline by as little as half a percent.
Obtain life insurance equal to six times your annual income. Different individuals require vastly different amounts of insurance, depending on whether one or both spouses work, minor children are part of the family, or insurance is being obtained for other needs, such as to fund a buy-sell agreement or to help pay estate taxes. Thus, you should determine your precise needs before purchasing insurance.
Most financial rules of thumb should not be followed without first considering your individual circumstances. Please call if you’d like to address your needs in any of these areas.
If you would like more information or to discuss your financial concerns
Insurance plays a vital role in your financial plan. A comprehensive insurance plan, which can include everything from auto insurance to disability insurance, helps protect you, your family, and your wealth.
Without insurance, most people would have difficultly coping with major and unexpected financial setbacks. Insurance is a reasonable way to plan for worst-case scenarios. In many ways, it’s the bedrock that supports your overall financial security. Some might even argue that if you have to prioritize, it’s more important to focus on developing a solid insurance plan before you worry about issues like investing.
Where Do I Start?
Most people already have some insurance. A typical adult with a family and a job might carry auto, life, and homeowners insurance (not to mention health insurance, which is another essential coverage). But most people purchase their insurance piecemeal, picking up a policy here and there when they need it. Rarely do people have a coordinated insurance plan that aligns with their overall financial plan.
Thus, your first step in developing an insurance plan should be sitting down and taking an objective look at your total financial situation, perhaps with the help of a financial advisor. Consider your age, family situation, the risks you face, and current assets and liabilities. This will help you identify areas where
you might need the peace of mind that quality insurance provides.
For example, parents with young children will almost certainly want life insurance, while people who suspect there’s a good chance they’ll end up in a nursing home may want long-term-care insurance. Sound complicated? It can be. Unfortunately, there is no one-size-fits-all approach to buying insurance.
Evaluating Your Risk and Determining Your Needs
Determining what kind of insurance you need to protect yourself and your family begins with an honest evaluation of the risks you face. But that’s just the beginning. For example, if you have young children, you probably know you need life insurance. But how much is enough and what variety (whole or term) is best? And what about other types of coverage? Should you buy umbrella insurance or disability insurance?
Life insurance tends to be the area where people have the most questions about whether their coverage is adequate. To do this, you need to imagine the unthinkable: How would your family survive if you were no longer there to support them? Don’t just pick a big number and assume it will be enough.
Consider this: You have a life insurance policy with a $1 million death benefit that you think will be more than enough to provide for your family if you pass away unexpectedly. Tragically, you die, and your surviving spouse uses $400,000 of the benefit to pay off your mortgage and some other debts, pay for your funeral, and cover other miscellaneous expenses. That leaves just $600,000 for your family. If your survivors invest that sum in a fund that earns an average 5%, that translates to a monthly income of $2,500. That amount may not be enough to meet all your survivors’ financial needs. And that assumes your financial situation is relatively uncomplicated. If you
have children with special needs or who will be attending college soon, you may need even more insurance.
When it comes to disability insurance, you may be tempted to rely on your company’s policy, but that might be a mistake as well. The coverage may not be as extensive as you expect, with a limited benefit period or a narrow definition of disability (you may only get benefits if you aren’t able to work in any occupation, not just your current occupation). Robust disability insurance coverage is essential if you do not have the resources to replace your current income should you become unable to work.
Long-term-care insurance is another essential component of many people’s financial plan. Given the high cost of nursing home care or a stay in an assisted-living facility, the need for these types of services in retirement would bankrupt many, even those with substantial retirement savings. If you suspect that you or your spouse might need such care, a long-term-care policy is one way to protect your assets and reduce the risk that you will run out of money paying for a nursing home stay.
Clearly, insurance and financial planning are intimately intertwined. It is difficult to separate one from the other. If you have questions about whether your current insurance coverage fits with your overall financial needs, please call to discuss this in more detail.
If you would like more information or to discuss your insurance or financial concerns
Copyright © 2020. Some articles in this newsletter were prepared by Integrated Concepts, a separate, non-affiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed but should not be regarded as a complete analysis of these subjects. Professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.
While life insurance can serve a variety of purposes, one of the most common is to maintain your family’s standard of living in case you die. Many rules of thumb exist, such as five to seven times your annual income, but don’t rely on rules of thumb to determine your coverage. They don’t take into account your individual circumstances. Your insurance needs will probably change over time. To determine how much insurance you need, consider these questions:
What lifestyle do you want to provide for your spouse and dependents after your death? Review your needs in detail, taking a look at things like:
- Do you want to provide the same standard of living? Will your spouse and children live in the same house?
- Do you want to provide the same standard of living? Will your spouse and children live in the same house?
- Do you want to provide the same standard of living? Will your spouse and children live in the same house?
- Will the family need different childcare arrangements?
- Do you want to provide for college educations?
- If your spouse doesn’t work, do you want that to continue, or do you expect him/her to work after your death?
- Do you need to consider the support of elderly parents?
- How long must your family live off the insurance proceeds? Will your current retirement fund provide enough income for your spouse to live on after retirement or do you need to provide income until his/her death?
- Do you want to pay off a mortgage or other debt with insurance proceeds?
- Do you have estate-tax considerations you want to address with life insurance?
How much will that lifestyle cost? Come up with an estimate of how much this lifestyle will cost. Include all of your current expenses that would remain the same, as well as any new expenses you have identified. Remember to factor in hidden costs, such as providing for health insurance that was paid for by your
employer. For large debts, such as a mortgage, determine whether it makes sense to pay the loan off in full or to continue making monthly payments.
How much life insurance do you need? First, consider what other income sources your spouse and/or dependents will have. This could include your spouse’s earnings, retirement plans, Social Security, savings, and investments. Life insurance proceeds will be needed to provide the difference.
Your life insurance needs will change over time, so you should periodically go through this analysis.