Building a Financial Fortress - The Next Level - Insurance
Maintaining an adequate amount of insurance is essential to build a strong Financial Fortress. Insurance provides a buffer against uncertainties to protect your wealth and in the case of life insurance, can also provide a retirement planning option.
Insurance comes in three main categories:
Liability - this can include a portion of the insurance you have on your car, a personal or business "umbrella" liability policy that provides excess coverage, or liability coverage maintained on an investment property; liability insurance is very important to have if someone is injured in a car accident or at one of your investment properties - 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 one
Life - 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 although the rate you pay typically goes up as you get older, whole life is "permanent" as long as you continue to pay the premiums and is usually a level payment; the nice thing about a whole life policy is that it grows in value annually (the "cash surrender value") and you can borrow against it to fund your retirement - loans are not income, are not taxable and are paid off with a portion of the death benefit; 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
Property - protects your property in the event of loss or damage (fire, theft, etc.) - most common is your homeowner's policy but 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 also be beneficial to buy all your insurance from one of the larger insurance companies since they offer discounts on multiple policies.
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