15 Quick Ideas: Insurance Planning
Photo by Vlad Deep on Unsplash
Looking at your insurance picture?
Wondering what to consider, what to prioritize, what to do?
Let’s go through 15 quick ideas.
1: Focus on what you can’t afford to lose
Focus on buying insurance for what you can’t afford to lose; anything else is optional and may not be necessary.
Insurance companies need to make a profit after covering costs, commissions, and claims. On average, a person is likely to lose money on most insurance. Thus, most people should only buy insurance for what they can’t afford to lose and/or to cover what could materially affect their financial picture.
An exception to this might be if the insurance provides you some emotional benefit or practical convenience that you highly value. An example might be opting for the rental car coverage on your auto policy; having to pay for a rental car out-of-pocket won’t bankrupt you, but you might highly value the convenience it would provide.
2: Look out for the “big” things
Look for the big risks in your life and make sure those are covered.
Optimizing the little things is nice, but not required.
3: Review insurance coverage periodically
People typically fall prey to a really powerful tendency – inertia. This leads them to keep paying for insurance they don’t need and not do routine price comparisons.
4: Do you actually need life insurance?
You may not need to keep your life insurance policy.
Life insurance is meant to protect your loved ones from financial ruin. If they depend on your income, then you need life insurance. If they don’t depend on it, you likely don’t need that policy anymore.
It can be more complicated than that of course, but that’s a good starting place.
5: Better to have too much life insurance than not enough
If you do indeed need life insurance (people depend on your income), I think it’s better to err on the side of having TOO MUCH coverage than not enough.
It’s better for your premiums to be a little too high now if it means your loved ones will truly be taken care of.
6: Don’t skimp on disability insurance
Do you have ample disability insurance?
What would happen if you couldn’t do your job and couldn’t get another one due to a disability? Would your loved ones be provided for?
Disabilities happen all the time, so don’t skimp in this area. Last I heard, you’re 6 times more likely to become disabled than to die in any given year. (If you’ve seen a more updated statistic, let me know!)
It’s great if your employer provides this coverage, but it’s worth thinking about whether it’s enough and whether you should buy supplemental disability insurance.
7: Consider getting a long-term care insurance policy
Do you need long-term care insurance?
Health insurance doesn’t cover long-term care. Neither does Medicare (after 100 days). But the cost can be huge, with a nursing home room often costing $100K+ per year.
Think through whether you’re comfortable self-insuring that risk or if you’d like to get insurance.
There are various options in terms of what kind of policy to buy and how to fund it. It’s definitely worth getting guidance from a good insurance agent.
8: Compound inflation rider = a good thing
If you have disability insurance or long-term care insurance, you should strongly consider making sure it has a strong compound inflation rider.
We all know things cost a whole lot more than they used to, so if you’re receiving, for example, $5,000 per month over the course of years or even decades, you want that to keep up with inflation.
9: Make sure your Dwelling coverage is sufficient
Will your home insurance policy pay out enough to rebuild your home?
Construction costs have skyrocketed over the past few years. There’s a good chance you don’t have enough insurance in place to truly rebuild.
Look at the “Dwelling” amount on your home insurance Declarations page. Then get a few quotes from insurance agents for how much they recommend having in Dwelling coverage. Those recommendations can vary dramatically, so you may want to go with something on the higher end of the range.
By the way, don’t forget about other types of coverage, such as earthquake and flood insurance. Those aren’t included in home insurance policies and have to be purchased separately.
10: Take a video inventory of your possessions
If your home were to be destroyed, could you list all your possessions? Like, all of them? Me neither.
The problem is that you’ll most likely need to create an inventory for your insurance claim.
You might want to consider taking a video inventory of everything in your house now. It could be as easy as just walking around the house with your phone, opening drawers, etc.
And then make sure to back up the videos online. And make a note to update the videos periodically, perhaps once a year.
If something were to happen to your home and possessions, you’ll be very thankful you took this step.
11: Replacement cost is the way to go
Make sure your home/renters insurance policy will cover everything at “replacement cost”, not “actual cash value”.
Replacement cost will allow you to replace your property with new materials/items.
Actual cash value will only give you a depreciated amount based on the age and condition of each item.
If you need to rebuild or replace items, you probably are going to want to purchase new.
12: Don’t forget about Uninsured/Underinsured Motorist coverage
Please take a look at the “uninsured and underinsured motorist” coverage on your auto insurance policy. Ideally it should match the regular liability and property damage coverage on the policy.
It’s unfortunate, but it happens all the time: Accidents occur where the at-fault party doesn’t have insurance (or just has the minimum amount).
If that happens to you, your insurer will NOT pay for your medical bills, lost wages, etc., unless you have uninsured/underinsured motorist coverage. And if you have just a small amount, then it will only pay up to that amount, which may not go very far if you’re seriously injured and can’t work for a period of time.
13: The importance of liability coverage
What would happen if you were sued?
For example, you’re driving to the grocery store one day and accidentally miss a stop sign and run into another car. That person may hire an attorney and file a suit against you.
That’s what your “personal liability” coverage on your auto insurance is for.
There’s a similar personal liability coverage on home insurance and renter’s insurance, which would cover you if, for example, someone slips and falls in your home or if your dog bites someone.
Don’t skimp on this coverage. Not having a lot of liability insurance could literally bankrupt you.
14: Get umbrella insurance
You should also consider getting “umbrella insurance”. This insurance is in addition to the liability coverage in your auto and home/renter’s insurance policies.
It’s sold in increments of $1 million. That might sound like a lot, but you might be surprised to see how much lawsuits can be for.
Adding umbrella insurance can provide relatively cheap coverage and undeniably valuable peace of mind.
15: How much liability insurance?
How much liability insurance should you have?
A common rule of thumb is to aim for 1-2 times your net worth.
So if your net worth is $1 million, you might choose to have $1-2 million in liability insurance between your home, auto, and umbrella insurance policies.
There’s some wiggle room in this rule of thumb, perhaps adjusting for the types of assets/accounts you hold and/or the likelihood you’ll be sued. But I find it’s a great starting place.
16 (Bonus Edition): Don’t be intimidated
Don’t let insurance scare you.
Is it confusing? Absolutely.
Does it seem like a waste of money sometimes? Sure, it can.
But if you ever truly need it due to a disaster of some sort, you’ll be so glad that you made sure to address it beforehand.
If you don’t know where to start, talk with a recommended insurance agent and/or a financial planner.