Planning for contingencies is so much a part of day-to-day life we forget we even do it. Like keeping a spare tire in the trunk or band aids in the medicine cabinet – just in case.
Those of us who drive have car insurance, most of us have healthcare coverage, and either home-owner’s insurance or a renter’s policy. We understand, and even hope, that we never use the insurance and are willing to pay the premiums for peace of mind. But what about planning for contingencies beyond car accidents and wind-damaged shingles?
Many other types of insurance can play a significant part in building out a strong financial plan. And, within the categories of insurance (life, disability, long-term care, key-man, business continuity) there are thousands of product options from hundreds of carriers. One of the best ways to figure out IF you could benefit from any of these coverages, and WHICH policy is best, is to leverage your financial plan and your financial advisor.
Pay your insurance agent separate from your financial advisor.
One of the best things you can do for yourself is to first understand the difference between an insurance agent and a financial advisor. Know how your financial advisor is compensated for the advice they give you. Are they compensated in any way for the insurance they recommend? Do they receive commissions on any of the insurance options that you are considering? If so, be cautioned that you may not be getting impartial advice. Leverage your insurance agent to outline your options. Leverage your financial advisor to model how each of those insurance options impact your financial plan so that you can make informed choices.
Ask the right questions and leverage your financial plan to answer them.
Life insurance can be an emotional purchase experience, and the quantitative nature of a financial plan can provide objective information about the best path to take. Consider the following questions.
1. How can I protect my family in the event of my death?
Two of the main considerations for families are replacing lost income and addressing outstanding debt. If a young, high-income earner were to pass away, multiple decades of income would be lost to the family. Not only a paycheck, but contributions to a 401k, calculations for future Social Security benefits, healthcare coverage and wage increases.
The other consideration, especially for younger families, is paying off debt. Often, that means a mortgage, but can also include private student loan debt, credit balances and car loans. All of which can ruin cashflow when there is a loss of income.
2. What type of life insurance is right for me?
The insurance industry truly offers something for everyone and is constantly inventing new product offerings that are more complicated than ever before. That is why it is particularly important to use the plan to drive your decisions so that you don’t purchase expensive bells and whistles you may not need. For many, term life insurance is the best option. Term insurance is an affordable no-frills solution offering pay as you go coverage that can be adjusted to suit your increasing or decreasing need for life insurance. While a young family may need large, or multiple, policies, a financially secure retired person with no debt and established adult children may have no true need to spend money on life insurance – no income to replace and no debt to pay.
Other forms of life insurance can be used for more sophisticated estate planning, to fund trust in certain situations, and to protect business partners in a joint ownership situation. A financial plan can reveal these needs and address costs.
3. What if I become unable to work?
Aside from the basics, there are many special solutions for those with special considerations. Many in their earning years include disability coverage in their arsenal of protection. Rather than providing for lost income upon a death, disability coverage supplements income in the event of the inability to work.
Pretty straight forward, right? Don’t neglect the behind-the-scenes considerations including taxation and the difference between working versus working in one’s established field.
4. What about additional protection?
Umbrella insurance is an often-overlooked coverage that can add additional protection to your standard auto and home insurance. Umbrella insurance adds significant liability protection if you are sued. While getting sued may seem unlikely, it can be costly, and the low cost of umbrella coverage can add peace of mind in today’s litigious society.
5. What if I need long term medical care?
As a society, we are living longer overall. Medical treatments are extending lives even for those with terminal illnesses. For many, the specter of paying for care during a lengthy illness causes great concern. With average inpatient care running at $10,000 a month, long term care expenses are a legitimate concern. Long term care insurance is an option worth considering but it is important to understand the caveats. Long term care insurance can be expensive, rates tend to increase over time, coverage can be limited, and you may never use the insurance after years of paying premiums.
Don’t Gamble. Use your Financial Plan. Rather than gamble on whether you will or will not need long term care in the future, use your financial plan to analyze how you will pay for it IF you need it. Model different scenarios based on your own situation to determine if long term care coverage and its cost really would benefit your plan.
As you can see, planning for contingencies, isn’t a one size fits all solution. Much like cash flow planning, there are lots of variables and just as many opinions. Throw in a dash of fear and a dose of guilt and you may suddenly find yourself making big financial decisions with limited factual information. You wouldn’t start driving from New York to Los Angeles with no plan (or Siri), so why would you jump into financial commitments with no map? Your financial plan is invaluable for getting you from point A to point Z, with all the contingencies in between.
Put a financial plan in place that serves your life and the people you love. We can help. SYM offers a confidential financial review that comes with no cost or obligation. Click here to get started.
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