Protect yourself: Why insurance planning should be a key part of your financial plan

You can achieve your financial goals, such as saving for a house or paying for your child’s education, only if you continue saving and investing as per your financial plan. Even a well-thought-out plan can be derailed by some unforeseen event. What would happen if you were injured or sick and could no longer go back to work? There could be various incidents in your life like this that would result in a reduced or complete loss of income and/or increase in expenses. While it’s impossible to predict if and when these unexpected events will occur, proper insurance planning can help protect yourself, your family and loved ones, your home, your assets, or your business against them.

The principal goal of insurance planning is to identify and analyze risks in your life and seek proper coverage to attain peace of mind if disaster strikes. The idea behind insurance is to get a group of individuals to contribute financially to a fund specifically designed to help individuals recover in the case of an unexpected loss. In this way, insurance eases financial burdens that can occur when disaster strikes. Think of insurance planning as a precautionary investment that shelters you from a large financial loss. Ideally, the best outcome is that you never have to make an insurance claim, but as the saying goes, it’s better to have insurance and not need it, than need insurance and not have it. Here are some of the insurance categories that should ideally form a part of your financial plan.

Auto/Home and Umbrella Liability insurance

A report by Esurance found that 77% of drivers have been in at least one accident. Car insurance estimates that the average driver will file an insurance claim for an auto collision once every 17.9 years. Thus, if you obtain your driver’s license at age 16, you will likely have a crash by the time you are 34. With that probability, it means the average person has 3–4 vehicle accidents over the course of their lifetime. Therefore, if you own a car and drive, there’s a high possibility you will get into an accident at some point in your life. An auto insurance policy can protect you from considerable liability in the event of auto theft or damage. It can also provide coverage for the expenses of another vehicle that you might have damaged in an accident or injuries to the other driver. Having this policy will ensure that such events do not burn a hole in your savings and investments.

Similar to car insurance, a homeowner’s insurance policy protects your home and possessions against damage or theft. In addition, it provides liability coverage to protect you from lawsuits filed by others. So, if someone slips and falls down your stairs is injured, and successfully sues for pain and suffering or lost wages, you’ll be covered for that. While homeowner’s insurance covers most scenarios where a loss could occur, some events are typically excluded from policies, such as natural disasters or other “acts of God,” and acts of war. If you live in a flood, hurricane, or earthquake prone area, you’ll want riders or an extra policy to cover these specific perils.

One of the benefits of renting is that it’s your landlord’s responsibility, not yours, to insure the property and make repairs when necessary. But as a tenant, you’re not off the hook completely. Your landlord’s insurance won’t pay to replace your belongings if a storm destroys the building, or a thief breaks into your apartment. If you want coverage for these and many other disasters, you’ll need a renters insurance policy, which covers your belongings if they’re stolen or destroyed, and pays out if you’re responsible for harm to other people or their property.

If you’re lucky enough to have more than $1 million in savings, you should consider umbrella liability insurance. If someone is injured in your home, or if you cause a serious auto accident, you could have to pay a significant amount in a lawsuit. These days, it’s not unusual to hear of $2 million, $10 million, and even $20 million court judgments against individuals. If you don’t have an umbrella liability policy at the time of the accident, anything above the limits of your homeowners/renters or auto insurance policy will have to come out of your pocket. By providing liability protection above and beyond the basic coverage that homeowners/renters and auto insurance policies offer, umbrella insurance can protect you against the catastrophic losses that can occur if you are sued.

Health insurance

When you’re uninsured, you’re on the hook for paying for any medical bills on your own. If you’re only paying for annual checkups, those bills might not be too high. But if something should happen to you, such as an injury or acute medical condition, like a heart attack, you’ll be responsible for all the costs of treatment and care. This is why everyone should have health insurance that can afford it. Unforeseen medical emergencies and critical illnesses can put you at a severe disadvantage financially. First, they can reduce your ability to earn, and secondly, they can increase your medical expenses. Most individual health insurance plans have a deductible, coinsurance or copays, and an out-of-pocket maximum per year. Having health insurance coverage won’t keep you from having to pay medical bills or visiting the emergency room. But it does put a limit on those bills, helping you avoid disrupting your financial goals.

Life and Disability Insurance

By far a person’s greatest asset is their earnings power. This is especially true for younger people entering the workforce that have multiple decades of income ahead of them. For example, a 25-year-old with a $50,000 annual salary and annual pay raises of 2% would have earned a total of $3 million after 40 years. If you have a spouse, children, or any other dependents, having a life insurance policy can be extremely valuable. It can help them maintain their standard of living, repay debts, cover everyday expenses, and keep their financial goals on track.

What would happen if an illness disrupted your ability to work for three months? What if a serious accident prevented you from ever working again? Would you be able to pay your rent or mortgage? Would your kids still have a college savings account? Would you be able to retire? If you or others depend on your income, you need disability insurance. Many people don’t like to envision a life in which they become disabled and are unable to work, but there’s evidence that they should consider their options. More than 1 in 4 of today’s 20-year-olds will become disabled before reaching age 67, according to the Social Security Administration.

Don’t just set it and forget it

Everyone has different insurance needs tied to their unique situation, age, health, family structure, economic status, possessions, assets, and many other factors. As discussed above there are several types of insurance and there is no “one size fits all,” but that is why insurance planning is so important. Every year, you’ll want to review your insurance, track your progress, and make any necessary adjustments, especially if things change (marriage, divorce, birth of a child, new job, etc.). If you need help along the way, consider working with a financial planner that can help review your entire financial picture.