5 Types of Insurance You Need To Have
This article was written by Paul C. Bennett. Paul is a Certified Financial Planner™ professional (CFP®), Chartered Financial Consultant (ChFC), Accredited Investment Fiduciary™ (AIF®) and Managing Partner of C5 Wealth Management, LLC . He is a featured financial advisor in Boomerater's Great Falls financial advisor directory.
1) Disability Income Insurance:
If you are still working, you should protect your biggest asset; your ability to earn a living! Disability insurance pays you if you become disabled, usually up to 60% of your salary. If your premiums are paid with after-tax dollars then the benefits are received tax-free. As an aside, most group policies offered by employers are good but many leave gaps in coverage that an individual policy would cover.
Key Takeaway - look for "own occupation" coverage, so the definition of disability in the insurance contract is based on your ability to perform the functions of your specific job, not any job. Also, if you leave your current job (like most people do 6-7 times in their lifetimes) your group coverage doesn't go with you, but your personal policy is fully portable.
2) Long-Term Care Insurance:
If you are no longer working and now retired, you should consider your "disability" insurance to be a long-term care insurance policy. You no longer have a salary to protect, but you may have assets and retirement income that you want to shelter. Many people incorrectly assume that Medicare will be their safety net, when in fact that is simply not the case. Medicare only covers skilled nursing care, and only for a minimal amount of time. Most home care and nursing home care patients require custodial care, which is help with Activities of Daily Living (things such as eating, dressing, bathing, transferring, using the bathroom, etc.).
Key Takeaway - Nursing care is expensive and can deplete your life savings quickly. Average nursing home, assisted living and home care costs can be found at http://www.aarp.org/families/caregiving/state_ltc_costs.html. The policies on the market today have become standardized and there are tax deductions available for the premiums.
3) Life Insurance:
If you are still working and have a family, life insurance is very important. Again, your ability to earn a living is your most valuable asset. If you are no longer on the "right side of the grass" as a client once said to me, then your ability to earn a living goes away as well...you can figure out the rest. There are basically two different types; term and permanent. Term insurance is less expensive than permanent and you can view it the same way you would view your auto policy - every year it renews and every year you pay a premium that is essentially an expense. Once the term of the policy is over, then you no longer have a policy. Most term policies can be purchased for 10, 15, 20 or even 30 year level premiums.
Permanent insurance comes in many varieties (whole, universal, variable, indexed, private placement, etc.). For the sake of brevity, let's discuss whole life. Whole life insurance is something you may own for your "whole" life. Essentially you pay premiums into the policy for a given amount of coverage for a specified amount of time (sometimes indefinitely). A cash value builds inside of the policy on a tax-deferred basis. As long as you pay the scheduled premium, you have coverage. You can learn about how much insurance you should consider by following this link to the NAIC (National Assoc. of Ins. Commissioners) web site: http://www.naic.org/documents/consumer_alert_life_insurance.htm.
Key Takeaway - If you are retired, you may not need life insurance for income replacement, but it may be necessary as part of a comprehensive estate plan. For example, by structuring the ownership of a whole life policy to be applied for and owned by an irrevocable trust, you may be able to minimize the effect of estate taxes eroding a large portion of your estate. Under the current tax code, if your estate is in excess of $3.5 million, you may have a need for a life insurance trust.
You will need to decide between a cash value policy and a replacement cost policy. A cash value policy will pay you for the value of the home at the time of its destruction which includes depreciation. A replacement cost policy will be more expensive, but will cover the costs of rebuilding your home to comparable quality. A key thing that many people forget to do is inform their agent regarding any improvements that were made to the home so that the valuation can be adjusted accordingly.
If you are moving to a retirement community or assisted living facility you should switch to renters insurance. Most, if not all, of the facilities have coverage for fire, destruction of property, etc. However, contents would be covered under a renter's policy, even though in a lot of instances one "purchases" not rents their unit in the retirement community. Title is really never conveyed on these transactions and in actuality it is just a large deposit you put down to live in the unit.
Contents: Jewelry, antiques and electronics all should be covered. However, how they are covered and to what limits is the important question. Jewelry and antique riders can cover specific items, such as an engagement ring or a fine painting. Make sure you update your rider when you get that new watch or a new piece of art. Most of the other items in the home should be covered up to 75% of the face value of the policy for contents. However, theft of fine jewelry or collectibles may not be covered unless you have a rider.
Key Takeaway - a great thing to do is to videotape all of the contents of your home and store the tape/disk/CD off site. That way, you have a complete record of the contents.
5) Umbrella Liability:
You're driving along the local highway after a long day at work. You're dressed in your work attire and then "bam", you rear-end the car in front of you. You get out of the car and the person you hit looks at this sharply dressed person walking toward him and begins holding his neck. Another example; your friend comes over for dinner and slips on the ice on your front porch and breaks his hip. All of a sudden he has medical bills, physical therapy and he can't walk like he used to because you forgot to clear the walkway.
Key Takeaway - let's face it; we live in a highly litigious society and you could be sued at anytime by anyone for anything. A smart thing to do, which is quite inexpensive but provides a lot of peace of mind, is add an umbrella liability policy to your homeowner's/auto policy. These policies are usually sold in $1,000,000 increments and cover you for events in which you could be held personally liable.
Of course if you are driving, auto insurance is a must-have mandated by law. There are several ways you can reduce the cost of your premiums... more to come in a future article here on Boomerater.
Are you looking for a financial advisor? Paul C. Bennett will provide you with a free initial consultation to discuss your financial needs. Please visit Paul C. Bennett's financial advisor profile to contact him directly. He is a Great Falls VA financial advisor.