When it comes to accomplishing long-term financial goals, the focus is typically on asset acquisition and growth. However, accumulating riches is only one side of the coin. Wealth preservation is an equally important part of financial planning.
Indeed, implementing risk management methods such as insurance into your financial strategy can provide stability by adding an extra layer of security that protects your hard-earned assets from unexpected setbacks. Simultaneously, a well-thought-out insurance strategy can assist keep your financial path on track in the long run.
1. Insurance can protect your assets and reduce risk
No matter where you are on your financial journey, insurance can help reduce your overall risk exposure if you experience an accident, health issue, or even a lawsuit. However, proper insurance coverage becomes increasingly critical as your net worth increases since you have more to lose in the event of an unforeseen setback.
For example, if you own a home or other valuable property, insurance can help protect you from excessive financial losses. According to the Insurance Information Institute (III), about 5% of homeowners make an insurance claim each year due to property damage, liability, or other reason, highlighting the value of a robust policy.
Meanwhile, the odds of becoming the target of a lawsuit—frivolous or otherwise—often increase as you accumulate more wealth. As a result, liability insurance tends to become more valuable the wealthier you are, as it can help cover legal expenses and potential settlements if someone takes legal action against you.
Most homeowners and auto insurance policies offer liability coverage up to a certain amount. Yet depending on your net worth, you may also benefit from an umbrella policy.
Generally, you should consider purchasing umbrella insurance when your assets exceed the combined liability limits of your home and auto insurance policies. The average umbrella policy costs between $150 and $300 per year for every $1 million in coverage, according to data from III, providing an additional safety net in a worst-case scenario.
2. Insurance can add predictability and stability to your financial plan
Life is filled with unexpected events. From medical emergencies to sudden home repairs, surprises can quickly throw your financial plan into disarray.
Even if you have a robust emergency fund, some expenses are simply too massive to cover out of pocket without derailing your progress toward longer-term goals. With the right insurance strategy, an unplanned setback is less likely to undo years of financial progress.
For instance, suppose you own a business that generates the majority of your household income. However, your business earnings are dependent on your involvement in the company.
If you experience a sudden illness or injury, you may not be able to continue earning the same income. This can create countless financial hurdles for your family, who depends on your income to pay fixed expenses and fund your financial goals.
Data show that 5.6% of working Americans experience a short-term disability every year. But with disability insurance, you may be able to recoup a portion of your income you’re unable to work, thereby providing a financial safety net.
Similarly, life insurance can add stability to your financial plan if you have loved ones depending on you financially. The death benefit can replace lost income, pay off debts, and even cover funeral expenses, ensuring that a tragic event doesn’t lead to financial hardship for your family.
3. Insurance can enhance your estate plan
Estate planning isn’t just for the ultra-wealthy; it’s crucial for anyone who wants to leave a financial legacy, distribute assets, or make the lives of their loved ones easier after they’re gone. In this regard, insurance can play an instrumental role in fortifying your estate plan, providing financial benefits that extend beyond your lifetime.
For example, long-term care costs can be one of the biggest drains on an estate, particularly if you require specialized care or a nursing home during your lifetime. In certain circumstances, long-term care insurance can help cover these costs, preserving the value of your estate for your beneficiaries.
In addition, a life insurance policy can significantly benefit your heirs by providing a lump-sum payment they can use in various ways, from paying off debts to covering estate taxes. Without this benefit, they may need to liquidate part or all of your estate to cover such costs, which may require them to sell off assets like property or investments at inopportune times.
4. Insurance may provide tax benefits
In some cases, insurance can play a pivotal role in your overall tax strategy, providing various tax advantages that can benefit you during your lifetime, as well as your heirs after you’re gone.
Read Also: The Top 5 Home Insurance Claims and How to Prevent Them
During your lifetime, your insurance premiums may be tax-deductible depending on the type of insurance and current regulations. For instance, health insurance premiums are generally tax-deductible in the United States, up to a certain limit.
After your lifetime, the death benefits from any life insurance policies you hold are usually tax-free for your beneficiaries. This can be especially helpful if your estate is large enough to potentially trigger federal or state estate taxes, which can significantly reduce your beneficiaries’ inheritance.
5. Insurance can help secure your retirement
Retirement should be a golden period where you get to enjoy the fruits of decades of labor. Yet achieving a financially secure retirement requires meticulous planning and strategic decision-making.
While many focus on savings, investments, and Social Security when preparing for retirement, insurance is also crucial for ensuring that your post-work years meet your expectations.
For instance, the right health insurance coverage in retirement is essential to offset the rising cost of healthcare. Indeed, the average 65-year-old retired couple may need roughly $315,000 to cover healthcare expenses, according to a 2022 Fidelity report.
Even if you qualify for Medicare, supplemental health insurance is often necessary to fill in the coverage gaps, so that out-of-pocket expenses don’t deplete your savings. This may also include long-term care insurance, as Medicare doesn’t cover most long-term care services.
6. Insurance can give you financial peace of mind
At its core, insurance is about reducing financial stress. Knowing that you’re financially protected in case of loss or hardship allows you to live life with a little less anxiety and a lot more freedom.
Furthermore, insurance provides a certain level of financial stability, allowing you to take calculated risks like investing in the stock market. In many cases, the rewards that come from taking such risks can be the key to achieving your financial goals and aspirations.
As your life and financial circumstances change, it’s crucial to review your insurance coverages to ensure they continue to meet your needs and align with your financial goals.
What are the 7 Main Types of Insurance?
Insurance is necessary even though it may not be interesting. Considering the high prices and intricate terms, it may be tempting to forego purchasing insurance altogether. It is simple to believe that you will never require the coverage when you have numerous kinds of insurance policies for everything. However, disasters can happen at any time and you will need insurance to protect yourself from severe financial losses.
However, not all insurance policies are worth the premiums, particularly if they conflict with your current plans or the specific situations they cover are unlikely to occur. So, which policies do you genuinely need for financial security, and which ones will cost you more in the long term?
To help you obtain comprehensive coverage without excessive costs, here are the seven types of insurance you do and don’t need:
1. Health insurance
While health insurance has become increasingly complicated over the last few years, it’s essential. An unexpected medical event can cause severe financial issues and even lead to potential bankruptcy. And as inflation rises, so do medical expenses, with a significant uptick of 3.1% in January 2023. Having a health insurance plan in place can not only protect you from potential financial loss due to an emergency, but it can also save you money on routine checkups.
2. Life insurance
There are many forms of life insurance, but the most basic and least expensive is term life insurance. This pays beneficiaries a specific amount of money if you die within the time period set in the policy.
In contrast to term insurance, there’s also permanent life insurance, which is designed to last for as long as you live, provided you continually make the premium payments.
Individuals should purchase life insurance based on their specific needs. For instance, someone with minors might need to purchase a higher amount of coverage to help ensure their children’s upbringing costs are covered in the event of their death.
3. Disability insurance
Disability insurance replaces a portion of your salary if you became temporarily or permanently disabled. While you might not think it’s important to consider, around 25% of today’s young workers will become disabled before the age of 67. Meanwhile, 35% of the private sector workforce has no disability insurance policy in place. There are a lot of nuances to this type of insurance regarding when you’d be able to receive compensation and under what circumstances. Make sure you’ve done your due diligence prior to purchasing.
4. Long-term care insurance
As many as 70% of people aged 65 and older will need some kind of long-term care in their life. Yet, the average annual cost of a private room in a nursing home in the United States is $108,405 and is expected to jump to $141,444 by 2030. Will you be able to afford this? Long-term care insurance is intended to help cover the cost of care received for home care, or in facilities like assisted living and nursing homes. When deciding between policies, look at the assets you have outside the insurance that could possibly pay for your care. Of course, you don’t want long-term care expenses eating into your retirement funds.
5. Homeowners insurance
Your home might be the biggest purchase you’ll ever make – don’t you want to protect it? Homeowners insurance pays for damage to your house and often provides the necessary funds for temporary accommodations while your home is being repaired. A homeowners policy will be required while you have a mortgage, but it’s still important to maintain once your home is paid for.
6. Umbrella liability insurance
This coverage extends the liability protection provided on your “underlying policies,” like homeowners and auto insurance. You can purchase additional coverage in million-dollar increments.
7. Automobile insurance
Approximately 5.25 million car crashes occur in the U.S. each year, according to recent data. Accidents happen, and it’s crucial to have car insurance for when they do. Beyond just collision coverage for your vehicle, auto insurance should also pay for the other party’s damage in the event of an accident for which you’re found to be at fault.
7 Types of Insurance Policies You Don’t Need
1. Private mortgage insurance
When you’re buying a house, if your down payment is less than 5% (sometimes, less than 20%), you’ll often be required to purchase private mortgage insurance. If you fail to make your payments, the policy pays it off – but it pays the lender to protect it against risks, not you or your family. Even when you’re paying your mortgage on time, the PMI premium payments, which can cost hundreds of dollars per month, can be a drain on your wallet. Once you have 20% equity paid into your home, ask your lender to cancel this insurance.
2. Mortgage life insurance
If you die, this policy pays off your remaining mortgage balance. Unfortunately, the money goes to your lender, not your surviving family. The premiums are also high. Consider replacing this policy with a term life policy and name your spouse or children as the beneficiary.
3. Flight insurance
You might think you’ve never bought a flight insurance policy when you purchased an airline ticket, but check with your credit card company. Some flights automatically bill you for the coverage when you buy a plane ticket. Even without this coverage, if you die in an accident, the airline is likely to compensate your family regardless of this additional cost. But that’s not the point. Your life insurance policy should have enough coverage to provide for your family no matter your cause of death.
4. Accidental death and dismemberment (ad&d) insurance
Unless your life is a Buster Keaton physical comedy, a deadly accident isn’t likely. Your home, life and auto insurance coverage should already protect you and your family from a financial loss due to a catastrophe like a car accident or fire; so your family likely doesn’t need more money because you die in an accident instead of an illness. And that’s not to mention the difficulty of proving that you died of an accident – and not a heart attack from stress following the accident.
5. Cancer insurance
Even if you have a family history of diseases, insurance policies designed to cover specific things, like cancer or heart disease, are rarely worth the extra costs in premiums. Similar to the above, you’ll want life and health insurance that pays, regardless of the diagnosis.
6. Credit insurance
If you die, this insurance pays off your credit cards. While this might sound like a good thing to do for any surviving family members, credit insurance is extremely expensive and not recommended. Besides, you’re not supposed to carry balances from month to month. Even if you do, cards in your name don’t automatically become the obligation of your survivors. And if you fear they’ll become their obligation, get term life insurance, which is less expensive.
7. Children’s life insurance
Don’t buy a separate policy for each child. Instead, add a child rider to your own life insurance policies. For about $25 per year, you’ll get enough to cover final expenses. Also, don’t buy life insurance as a means of saving for college. Instead, establish a 529 college savings plan.
