What Insurance Do You Really Need? - Episode 19
Today, I’ll cover the main types of insurance coverage and how to determine what coverage you need. The types of insurance covered are life, disability, umbrella liability, property and casualty, and long-term care insurance.
Listen to Episode 19 Here:
Who needs life insurance?
If you have kids or a spouse that depend on your income, you need life insurance. If you have a spouse that depends on you to be the caregiver of your kids, you need life insurance.
I’d like to note that retirees may not need life insurance, if you have enough assets to cover any debt and or obligations or you are debt free and your spouse has enough cash flow then life insurance becomes unnecessary.
But if you do need life insurance, how much is sufficient?
How much life insurance do you need?
If you are married or have children, you should ensure your spouse will have enough to pay off all mortgages and other debts to alleviate that burden. You should also ensure you have enough for your spouse to support your children until they are on their own as well as have enough for your spouse to continue with a similar lifestyle. These amounts obviously vary on a case-by-case basis.
Term life vs. whole life
There are generally two types of life insurance: term life and whole life (i.e., permanent insurance).
I generally prefer term insurance because it is more efficient and substantially less expensive. We mostly use insurance as a risk management tool, and the most efficient way to purchase life insurance is with a term policy.
In general, when the financial industry combines products, e.g., insurance and investments or investments and “guarantees” the companies making such products usually add a hefty amount of fees and/or restrictions making them less liquid, more expensive, and less desirable.
There are certain estate planning situations when whole life (i.e., permanent life) insurance may be advantageous, but a very high percentage of the time, purchasing term life for risk management, and not for investing, is recommended.
Disability Income Insurance
Who needs disability insurance?
If you depend on your ability to work for cash flow (and most do), you should have disability income insurance.
Disability insurance is meant to protect you from the financial burden of losing your income if you become disabled and/or can no longer work. It’s basically like income replacement.
If you are not getting a paycheck due to disability, you will receive a monthly benefit from your insurance company. Your coverage is the amount of this benefit, and the amount of coverage you need depends on a handful of factors such as your occupation and financial obligations.
Similar to life insurance, once you retire, disability insurance is no longer necessary because you are no longer dependent on your ability for work for your income.
How much disability coverage do you need?
This obviously depends on your income and how much your monthly expenses are. You will need to ensure you can get enough to cover your cash-flow requirements. The disability benefit is based on your actual wages, and it can be as high as 60 to 70% of your paycheck.
For that level of coverage, you can expect to pay between 1% and 3% of your annual salary in premiums, with the amount varying based on how much coverage you’re hoping to buy. You’ll also want to take into account how long you want to receive checks, which is called the benefit period, and you could pay less in premiums if you go with a disability insurance policy that has a longer elimination period, the length of time before benefits kick in.
Policygenius has an in-depth article on disability insurance that even includes a sample disability insurance rate illustration at the end.
Many households are making a mistake if they are overlooking the importance of disability insurance.
Umbrella Liability Insurance
Who needs umbrella liability coverage?
Umbrella insurance increases the liability protection on your automobile and homeowners insurance. It can also cover personal watercraft as well. Anyone with assets or net worth over their traditional liability coverage of $300,000 or having a good deal of future earnings ahead of them could use umbrella insurance.
Why would someone need umbrella liability in addition to property and casualty insurance? Maintaining an umbrella policy protects you from extreme financial losses, especially injuring someone in an accident.
If you crash into someone or something with your car, and the claim against you is above your current policy’s liability amount, an umbrella policy would increase your protection. The same goes for homeowners/renters insurance. If someone is injured on your property, your umbrella policy can increase your liability protection.
First, you’ll also want to make sure to max out your liability coverage on your existing homeowners and auto policies to prevent gaps in coverage. For example, let’s say you have a $1 million dollar umbrella policy that kicks in at $300,000. If you had a claim of $1,000,000, any liabilities from $300,000 to $1,000,000 would be covered by your umbrella, but if you didn’t have your liability coverage at $300,000 on your homeowners or auto policies, you would be on the hook for the difference.
So, if you had $100,000 in liability coverage instead of $300,000, and you cause damages of $1,000,000, you would be on the hook for the $200,000 gap. So be sure to have full liability on your policies.
You can think of the $300,000 liability coverage on your homeowners or auto policies as a deductible for your umbrella policy, and since the “deductible” is so high ($300,000), the umbrella policies are relatively inexpensive.
How much umbrella coverage do you need?
If you’re a retiree, you’ll want umbrella coverage approximately equivalent of your assets or net worth, so anything you own that creditors could come after in a lawsuit.
For retirees, you probably won’t need umbrella coverage more than your assets. But, just because you have a net worth of $1 million, this doesn’t necessarily mean that you couldn’t face a judgment of more than $1 million.
Umbrella liability provides an additional level of protection. The value of your umbrella liability should at least cover your net worth.
For the following types of coverage, I asked insurance agent Toni Fosdick with Compass Insurance Partners for some input.
Property and Casualty (P&C) Insurance
Who needs P&C insurance?
Anyone who has an exposed risk from owning a home or business would need casualty to protect their assets from accidents and lawsuits.
Toni states: “Property insurance is necessary for anyone wishing to protect their interests in either personal property or business property. It is a supplement to restore someone’s personal property or business property to what it was before a loss occurs.”
She also says, “On rare occasions, one may self-insure if they feel comfortable if a total loss hits that they can restore their property to what it was before the loss without outside help.”
How much P&C coverage do you need?
Generally, a variety of factors such as: square footage of the home or building and receipts for property and building materials are used to determine how much insurance is necessary and what type of coverage is the best fit for the client’s needs. These factors along with an insurance professional and/or company help determine the amount of insurance coverage needed.
Don’t be afraid to check around on your property and casualty coverage every year or so since costs can vary quite a bit in a short period of time.
If you own a vehicle, you are legally obligated to have insurance to cover damages and injuries to other people.
As far as insuring your actual vehicle, Toni states, she always tells people if they have enough in savings to cover a new vehicle, should something completely total the one you have, you may not need to pay for the property (or comprehensive and collision) insurance. You should be ok simply with liability. But if something happens and they cannot replace it easily, then they should insure with comprehensive and collision on the vehicle as well.
As to how much coverage you may need, Toni says, “Liability limits are best established by an insurance professional. We always do a minimum of $250,000 per person and $500,000 per accident. With the experiences we have had, this level usually covers injuries in a serious accident. However, if you have more assets and teenagers driving, we recommend higher limits and an umbrella policy to protect them. For example, I have friends, family and my own family at $500,000 per person and $500,000 per accident.”
She also has an umbrella policy for $1,000,000 that will pick up any claims above the $500,000 auto limit. So, she’s eating her own cooking here, which is something we look for when working with other professionals.
Long-term Care (LTC) Insurance
I recorded a podcast episode last year about long-term care, so today I’m just going to cover some highlights.
Who needs long-term care insurance?
Based on the numbers, LTC policies make sense for anyone whose financial situation would be jeopardized by a 2-year stay in a nursing home, which is equal to approximately $200,000 or a 2-year stay at home which is about half the cost at approximately $100,000.
Coverage could be a good idea if:
You have enough retirement income to cover your living expenses and cover the cost of the policy
You don’t have enough assets to self-insure
You want to leave an estate
Note: The National Association of Insurance Commissioners says some experts recommend spending no more than 5% of your income on a long-term care policy. If the premiums are going to put you in a tight situation, it might not be worth it.
When should you purchase LTC insurance?
The older you are when you apply, the higher the premium, but typically, the best time to shop for LTC is when you are in your 50s.
These policies generally cover a portion of the costs for a defined period, like 3 years, 5 years, 7 years and so on. LTC is another way to help mitigate a retirement plan’s uncertainties down the road.
There are also life insurance and annuity contracts that provide long-term care benefits. If you have an existing whole life policy or annuity without an LTC rider, you may be able to exchange it into one that does. Reach out to your agent or advisor and start there.
As I mentioned, in-home care is about half the cost of nursing home care, so I tell all my clients to prepare their homes for older/less mobility ages as best they can.
This includes trying to get everything on one living level if possible, adding bars in bathrooms to assist mobility, adding small steps where necessary and even adding voice activated devices like Alexa or Google Home so they could just tell it to contact someone in an emergency.
Please also refer to episode #4 about long-term care insurance.
There is my high level view of some different types of risk management insurance and who might need each and when.