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An often overlooked aspect to comprehensive financial planning is the essential role of having needed insurances. Insurance may not be as sexy or entertaining as stock picking, visualizing a retirement filled with trips around the world, or visiting a casino to put it all on black (/s); but it fills a vital gap in any well thought out plan – covering unforeseen events. Let us give you a quick overview of different types of insurance, and who is best served to be covered by each one.
Automobile
The most common coverage of this type of insurance are uninsured and underinsured motorist coverage, auto liability coverage, collision coverage, comprehensive coverage, personal injury protection, and medical payments coverage. Depending on the laws and regulation of where you reside, some of these coverages can be mandatory or optional. Thus, get to know your state’s requirements so you’ll be able to choose the right coverage for your situation.
Medical/Health
The cost of medical care has risen to astronomical levels in the United States. In fact, 40% of all bankruptcies are a result of uninsured medical costs in the United States. Suffice it to say, it’s in your best interest to have health insurance!
For most people, health insurance is provided through their employer as a benefit. For those who are either not employed or do not qualify for health coverage through their employer, there are some resources available: With the signing of The Affordable Care Act in 2010, a healthcare exchange was created as a way to help citizens shop around and compare health insurance policies available to them. If you find yourself looking to buy insurance, this is a good place to start.
A financial plan frequently is built upon having an income source, and the plan can go awry if the provider of that income passes away. Enter: Life Insurance. This important insurance type insures the life of a human being – paying out a lump sum amount to beneficiaries in the event of the death of the insured.
Life insurance is monumentally important as a foundation to financial planning. In the case of a family with children: if the primary earner passes away, the surviving spouse will receive a tax free lump sum payment to help the family pull through.
Disability Insurance
If you are insured and/or incapacitated and unable to work, disability insurance will step in and help fill the income gap. According to the most recent data provided by the Social Security Administration, the probability of becoming disabled before retirement stands at just over 25%.
While this may not be a financially devastating event to those who are further into their careers and have accumulated substantial assets, it can wreak havoc on someone who either hasn’t had the time to build a large enough portfolio to sustain them without a paycheck or someone who is living paycheck to paycheck and unable to save/invest.
Disability insurance may be part of your benefits package offered through your employer, oftentimes paying you a percentage of your working salary. Social Security also has disability insurance available, and its monthly payments are determined by your wage history while working. Whether or not disability insurance payments are taxable to you depends on who paid the premiums. If your employer paid the disability premiums on your behalf, then the benefit will be taxable, whereas if a regular payment for disability insurance was deducted automatically from your paycheck, then the benefit will not be taxable to you. In the case of Social Security Disability payments, they are taxable as ordinary income.
Liability Insurance
This type of insurance aims to protect the insured against claims coming from damages and injuries to other people. If they’re found liable, the liability insurance covers any potential legal costs. Do note that contractual liabilities and any intentional damages done isn’t usually covered in this type of insurance. Also, liability insurance doesn’t pay the policy holder, in the same way as other types of insurance, but it’ll cover the third party involved, which is why it’s also called third-party insurance.
Policies are likely taken out by anyone who drives a car, a business owner, or those currently in the field of medicine or law who can be sued for damages and/or injuries.
Recap and Action Items
As mentioned, insurance may be the most overlooked and underappreciated aspect of financial planning, but it is nowhere near the least important. If you find yourself needing to shore up your insurance policies, do your due diligence and decide what’s best for you. You may find it helpful to work with a licensed insurance broker, who can go over your life situation and drill down to what insurance types are needed.
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