Insurance plays a major role in the life of the financially savvy. The purpose of insurance is to transfer a risk that you are not able to take to the insurance company for an agreed upon premium payment. The easiest example is homeowners insurance. Could you afford to rebuild your house if it were to burn to the ground? Probably not. This is a risk we must transfer to an insurance company.
A solid insurance portfolio is the foundation of any empire. When purchasing insurance we must be careful that we are buying the correct type of policy and right amount of coverage. This can be tricky because the salesperson that is advising us will typically have a direct conflict of interest with us as the consumer. Insurance agents or brokers get paid a commission based on the amount they get you to spend so buyer beware. The best way to get advice on insurance coverage is to hire a fee only Certified Financial Planner that is not able to get paid commissions to help guide you through the process. Here are the basic types of insurance that make up a solid foundation:
Homeowners – If you own a home it is a necessity. A few tips to consider:
- Make sure it is enough to cover the cost to rebuild your house
- Include liability protection in case someone gets hurt on your property and sues you.
- The higher the deductible the lower the cost of the insurance. I have a $2500 deductible.
Auto – If you have a car another necessity. Same tips as above. Shop prices every couple of years and make sure you are getting all available discounts.
Umbrella – These policies cover you from liability above and beyond or outside of your home or auto policy. A typical policy is for $1 million of coverage at the cost of around $150 per year. They are worth the extra layer of protection. For example, if someone gets seriously injured on your property and they win a lawsuit for more than what is covered in your homeowners policy then the umbrella policy would kick in and pay.
Life Insurance – Is there someone that would suffer financially if you were to die? If so, then you need life insurance to replace your income if the worst were to happen. Life insurance is not an investment plan, retirement plan, or college savings plan. It is a “make sure my loved ones are able to continue paying the bills” plan. Life insurance replaces your “human life value” in terms of money if you were to die. I will focus on types of life insurance and how to calculate how much you need in future posts and videos. My basic philosophy is keep it simple with life insurance. Get a 20 or 30 year term with a big death benefit at a low cost.
Disability Insurance – This one is so important yet often times overlooked or ignored. What would happen if you were to get very sick and could not work for an extended period of time? What if you were in a bad accident and were out of work for years while rehabilitating? What would your family do to pay the bills? In the blink of an eye you go from being the breadwinner bringing home paychecks every two weeks to becoming a financial burden on your family. It happens more often than people think. You need to protect your income in case you live and can not work. Life insurance protects your loved ones if you die, but what if you live? Take a serious look at this one. Many employers offer group disability coverage, but is usually not enough or only covers a strict definition of disability.
Arm yourself with the right type of coverage for these 5 insurance policies and you will sleep better at night knowing that you and your family are protected no matter what life throws your way. Consulting a financial advisor to determine the correct types and coverages is a great idea. Just PLEASE make sure the advice is coming from a fee only fiduciary advisor that understands your entire situation and most importantly can not get paid a commision on their recommendations!!