Financial Planning - Insurance
Proper insurance coverage is an important part of financial planning. Simply put, insurance is important because it protects your income and assets from catastrophic loss. Life and disability insurance protect against the loss of income due to death, illness, or injury. Employees of large corporations are often provided with health, life, and disability insurance but many are left to provide this coverage for themselves. It's also important that sole proprietors, the self-employed, or employees without company-provided plans are protected against illness and injury.
The types of insurance and the amounts of coverage needed are unique to each individual and family. Car insurance isn't necessary for those who don't own a car, but health insurance is needed by everyone.
Term Life Insurance
Term life insurance provides coverage for a length of time known as the "term." The term can be as short as one year or as long as 20. There are two parts to a term life policy: the premium and the death benefit. The premium is paid by the insured in order to keep the policy in force. The premium can be paid monthly, quarterly, or annually and is based primarily on the insured's age, gender, and health status. If the insured dies while the policy is in force, the beneficiary is paid the death benefit. He or she can then use the money for any purpose.
Term life insurance is typically most appropriate for young families who need to make sure that the surviving spouse will have enough cash to pay the mortgage, car payments, credit card bills, and other debts. It might also be used to ensure that a child (or grandchild) has enough money to finish college.
Term life insurance does not have a cash-building feature. Once the term is over, the policy ends. The policyholder can usually opt to renew for another term, but the increase in the amount of the premium may be cost-prohibitive. For this reason, most insurance companies offer term life policyholders the option of converting the policy into a permanent life policy.
Permanent Life Insurance
Unlike term life insurance, permanent insurance can last indefinitely. Provided the premiums are paid according to the specifications outlined in the contract, the insurance coverage remains in force for as long as the policyholder is alive. (Some states, however, allow a permanent life policy to be cancelled at age 95 or 100 as long as the account balance is returned to the policyholder.)
Permanent life insurance also has a cash-building feature. A portion of the premium is applied toward paying the death benefit to the beneficiary. The balance is applied to an investment account that is invested on behalf of the policyholder. There are three types of permanent life policies: whole life, universal life, and variable life. Each has a separate method of investing a policyholder's money and each can be appropriate for various circumstances.
While some people do purchase permanent life policies for the investment opportunities they provide, it's important to remember that the primary function of a life insurance policy is to protect the standard of living for surviving family members.
There's no question that health insurance is a critical part of any financial preparedness plan. Some government and private industry calculations show that health care costs are rising at four times the rate of inflation. There are a number of reasons this is happening, some of which are based on fact and some of which are based on politics. Either way, Americans are going to have a harder time affording medical care in the future.Because out-of-pocket costs are so high for those without insurance, all workers with access to an employer-based plan are encouraged to take part. Even premiums as high as $100, $200 or $300 per month are likely less than the cost of one emergency visit or major surgery. Health insurance also provides for wellness and preventative care that is crucial in preventing disease. Annual exams and tests, including screenings for diabetes, high blood pressure, cervical cancer, and other types of treatable conditions, reduces the cost of treatment and promotes life-long wellbeing.
Property and Casualty Insurance
All mortgage lenders require homeowners insurance. It protects your investment and their money. Even if a homeowner hasn't made a significant down payment, the loss of furnishings, appliances, and clothing can amount to a large sum of money. Homeowners insurance protects against theft, fire, and in most cases, storm damage. Flood insurance, however, is not typically included in a standard homeowners policy. Those in flood plains, near coastal areas, and in places where floods are only "100 year events" should check to see how flood insurance can be added.
Business Liability Insurance
Business owners in particular need to make sure they are adequately insured. Pizza parlors, attorneys, dog treat makers, and even small advertising agencies can be liable for hundreds of thousands of dollars if sued.
While there is no substitute for adequate insurance coverage, business owners often take advantage of annuities and life insurance policies. Both of these investments are contracts. By law, contracts can neither be cancelled nor seized in the event of a legal judgment. Property, savings and brokerage accounts, and even individual retirement accounts can be used to satisfy a lawsuit. Annuities and life insurance policies offer great ways to safeguard a business owner's assets.
Small business owners especially must ensure that the articles of incorporation for their businesses are written properly so that their personal assets won't be seized in the event of a lawsuit. Company credit cards and rental agreements are usually structured so that there is individual responsibility for debts incurred. But in the event of a large suit or trial, a business owner always needs to make sure that his or her family is not vulnerable.
While we've covered the basics of financial planning here, there is much more to implementing a financial plan. To make sure you're on the right track, contact a licensed financial advisor. It only takes a few minutes, Start Now.
More Financial Planning Guidance
- Financial Planning Guide — The complete guide to financial planning.
- Financial Advisors — Understanding how to work with a financial advisor.
- Investment Guide — Explore various investment options to grow your nestegg.
- Credit & Borrowing — Discussion of how to manage good vs bad debt.
- Tax Considerations — In-depth discussion of how to minimize tax burden.
- College Savings — Explore various ways to safe for a child's college education.
- Financial Planning FAQ — Frequently asked questions about financial planning.