Risk management or insurance is another topic that is not a very popular financial planning topic. And purchasing an insurance policy is often a frustrating experience that can leave you even more confused than when you started. Each insurance company has their own specialty insurance product, with special riders and conditions that apply and trying to compare a policy with different insurance carriers can be a very confusing task.
Having said all that, for most of us, insurance is an essential part of a sound financial plan and should not be ignored. Insurance can be used to protect your finances from an unexpected financial expense or loss caused by an accident, a natural disaster, a medical problem or death.
In financial planning terms, using insurance to cover these events transfers the risk of loss from your finances to the insurance company. The more coverage you carry the more financial risk you transfer to the insurance company and the higher are the insurance premiums you pay to transfer that risk.
Here are the four basic types of insurance that should be considered in your financial plan:
- Property/liability losses–Automobile and home insurance are the two most common types of insurance coverages here and consist of carrying enough coverage to replace the value of your property or potential risk of a law suit for negligence on your part. Property/liability coverage is usually a must have in terms of protecting your finances.
- Disability income losses–Disability insurance covers the potential of temporary loss of income due to an accident or other medical condition and is also usually a must have. Short term disability and long term disability coverage usually offered through an employer is the most common way this coverage is obtained, but depending on your situation may not be entirely adequate for you. This risk should be carefully evaluated.
- Medical care expenses-Medical insurance premiums are among the fastest growing insurance expenses most people face today. Despite the higher premiums and lower benefits, medical coverage is also another must have since a serious illness or medical condition can result in a financial disaster. In addition to medical insurance, other specialized coverage such as long term health care , depending on your situation, should be considered since an extended stay in a nursing home could have a catastrophic affect on your finances.
- Premature death–Life insurance is used to replace the lost income as well as provide additional funds that may be needed to payoff other expenses such as a home mortgage, college educations costs, retirement funds or other expenses that the deceased was planning to provide. In short, life insurance is for the living. Life insurance can also be used for other purposes such as leaving an inheritance at death or providing funds for some other specialized purpose.
Because of the complexity of insurance products available it is important to understand your specific risks in these areas and create a strategy to provide a reasonable cushion from financial loss. Here at Modular Financial Solutions, Inc. we can evaluate each of these areas and make appropriate suggestions for prudent levels of coverage, starting with an appropriate value for an emergency fund which is usually your first line of defense against unexpected expenses.
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