Most people consider insurance an important part of their financial plan. But do you also have an insurance philosophy that you use to determine exactly how much coverage you need?
Forming an insurance philosophy requires you to think about the people and possessions that matter the most to you. How do you want to protect them? What are the risks involved? Are monthly premiums or out-of-pocket payments more in line with your philosophy and your financial means?
Here are four important questions that will help you crystalize your insurance philosophy and make sure it is well-integrated in your financial plan.
1. Do you currently have some level of insurance to cover the most important things in your life?
Life, health, auto, and homeowner’s insurance are the big four. Having some level of coverage in these areas should be considered the baseline for most people.
But what about other special considerations? Are you partners in a small business? Are you insured against your partner dying or leaving the company? Are your business assets protected in case you get sued? Do you own a classic car, art, or jewelry that you want to protect?
Take a moment to list the important things beyond the “big four” that you should consider insuring. Are there reasons you haven’t insured them already?
2. What are your risk levels?
Your health and your spouse’s health are probably the two biggest factors to consider when thinking about your risk levels. Depending on your ages, this isn’t just a matter of life and death. Be mindful of any ongoing conditions or family medical history that could impact the main income earner’s ability to keep working until retirement.
Do you work in a volatile industry? You might benefit from supplemental income insurance if you’re at-risk for sudden unemployment.
If your job is dangerous, or if you have any thrill-seeking hobbies you just can’t give up, you might want to buy more life insurance.
Do you live in a part of the country that’s prone to natural disasters? Is your home’s safety at risk?
What other things in your life affect your risk levels?
3. Do you have the financial capacity to pay out-of-pocket when trouble hits?
The more you pay monthly in premiums, the lower your out-of-pocket costs will be. And the higher your risk levels, the more you probably should be paying in premiums every month.
But people who choose to self-insure don’t always see insurance that way. They would rather pay minimal premiums and cover the rest out of pocket as necessary.
Things can get expensive at either extreme. After a fender bender, you’ll love your tip-top auto insurance as you drive away from the body shop with paying just a small deductible … but those premiums won’t be dropping any time soon. On the other hand, you might forgo an umbrella insurance policy and save the money … until you get sued for creating property damage.
Interestingly, we’ve seen people with substantial means, people who have the ability to self-insure things like long-term care insurance, yet still choose to get it. Why? Because they’d rather spend their money on an insurance premium than possibly spend much more of their hard-earned money on healthcare costs. Or they just like the security of having that potential big expense covered.
Each one of us is different and that’s why it’s important to intentionally consider your insurance philosophy.
4. If something happens to you, is your family provided for?
Life insurance isn’t as exciting as investing in the stock market or watching your IRA and 401(k) nest egg grow. Thinking about it doesn’t make us happy. It’s not an asset that you will look forward to cashing in one day. It’s simply there for your family when they will need it the most.
Some people rely on life insurance that their employer provides. But in most cases, this insurance only provides one or two times the insured’s annual salary. A term life insurance plan can provide years of assistance to your family should the worst happen.
What is your insurance philosophy?
As you’ve gone through this list and considered these questions, you may have felt your insurance philosophy settling at one end of the scale. Or maybe you felt your philosophy sliding between wanting to pay higher premiums for some things and wanting to pay out of pocket for others. Remember, one size doesn’t fit all. You may decide to buy a two-million-dollar life insurance policy. You might also decide to leave your classic Corvette underinsured and under a tarp in your garage. Maybe grandma’s pearls just need a fireproof lockbox until your daughter grows up.
Ultimately, the particulars of your insurance plan aren’t as important as having a plan in place for each of the things you want to protect.