Before The End of 2018, Check Your Insurance!
Maintaining an adequate amount of insurance is essential to building a strong Financial Fortress. Insurance provides a buffer against uncertainties to protect your wealth and in the case of life insurance, has the added bonus of providing a retirement planning vehicle.
Here's a very brief summary of the different types of insurance and their benefits:
Health / Dental Insurance - Health and dental insurance are normally offered through the workplace and this post is focused on those types of insurance that aren't typically part of the annual enrollment process, which should be complete soon for January.
If you haven't already completed your annual open enrollment, make sure you do and look at all your coverage even if you are happy with keeping everything the same
Some things like flexible spending accounts, dependent care accounts and healthcare savings accounts do not "roll over" and have to be re-established each year
Make sure you take advantage of workplace life insurance and supplemental life insurance programs, as they are usually inexpensive, but as I mention below, it's also good to have "portable" life insurance outside of work in case you lose your job
Liability Insurance - This can include a portion of the insurance you have on your vehicle, separate liability coverage maintained on an investment property and an "umbrella" liability policy that provides excess liability coverage beyond the limits in your vehicle and investment property policies
Liability insurance is very important to have if someone is injured in a car accident or at your investment property
As a general rule, you should maintain liability coverage at least equal to your net worth (home equity plus all other assets, minus liabilities)
Umbrella policies are relatively cheap and are a good source of excess liability coverage
If you have significant net worth, you can't afford not to have a liability policy
Life Insurance - there are many different types of life insurance, but the two main types are term life and whole life
Term life buys you insurance for a period of time (i.e., policy "term" ends at age 65 or 70) and the annual payment usually increases as you get older up to the policy expiration date
Term life coverage is usually cheaper than whole life and does not build up any "cash surrender value," which I describe below
Whole life is "permanent" until death as long as you continue to pay the premiums and is usually a level annual payment, but the premium is quite a bit higher than term life
The nice thing about a whole life policy is that with the higher premium, a portion of it grows in value annually (this is called the "cash surrender value") and you can withdraw or borrow against it to fund your retirement
You can always cancel a whole life policy and get the cash surrender value if you need the cash (there may be fees involved in cancelling the policy that would reduce the cash you receive), but it's probably better to find some other source of funds in an emergency
Life insurance policy loans are not considered taxable income and are paid-off with a portion of the death benefit; they are a great way to fund retirement income, although they do reduce the death benefit paid to survivors
You really only need a small amount of life insurance if you are single, but once married and with kids you'll need to increase your coverage for each person in the household who works - ideally you should have coverage equal to 3x to 4x your annual gross income
I also recommend you maintain at least one policy outside of work in case you lose your job to ensure you still have continuous life insurance coverage; a cheap term life policy to start with would be best and these are sometimes convertible into whole life later with no need for a physical exam
Property Insurance - protects your property in the event of loss or damage
Most common is your homeowner's policy, which covers damage to your home and its contents from fire, flood, storm and similar events and may also include liability coverage
In California, you an also get earthquake coverage, but it's very expensive
If you rent, you can get a renter's insurance policy that covers all your personal property in case it gets damaged or stolen; most policies also have some landlord property damage coverage
Can also include insurance for personal articles (i.e., wedding ring), rental property and a portion of your car insurance policy
For a homeowner's or rental property policy, it's a good idea to make sure the coverage includes replacement cost and code upgrades - check annually at renewal time.
It may be beneficial to buy all your insurance from one of the larger insurance companies since they offer discounts when you have multiple policies.
State Farm is the company I have used for years and they handle all my insurance needs except life and I have been happy with the customer service. For life insurance (outside of coverage I receive at work), I have used Northwestern Mutual for many years and have been happy with the financial stability of the company and the customer service.
Disclosure: I don't have any affiliate arrangements with the companies mentioned in this post.
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