How are you managing risk in your financial plan?
Insurance is a way to manage the unavoidable risks in life. If you ask, “How much insurance do I need?” or, “What should my deductible be?” the answer is: it depends.
When deciding how insurance best fits in your financial plan, the decision should be based on how much risk you can assume and what you can afford. Whatever risk you don’t want to take on you can displace by having insurance, which you pay for.
Here are three simple questions to ask yourself when choosing an insurance plan:
- How much can you afford to spend on insurance?
Insurance is too expensive to be considered an investment, therefore it needs to fit into your budget. How much of your budget can you use for insurance expenses? If you have less to spend, focus on the essential types of insurance first: property and casualty (this includes auto and home), and health insurance. Also, consider what stage of life you are in. If you are younger, you may not need life insurance because no one is dependent on your income. Yet, life insurance is probably the least expensive when you are young and healthy. Never an easy answer, but it does come down to affordability, applicability and risk tolerance. We recommend discussing your situation with a professional who can provide you perspective and be unbiased with their advice.
- What can you afford to lose?
What you can afford to lose, or risk tolerance, is what insurance companies call your “deductible, co-pay or out of pocket expense.” Because insurance is about managing risk, look at what you could afford if the worst were to happen. The number one reason people go bankrupt is they fail to cover the risks they cannot afford. Make sure you understand the liability you are assuming based on the coverage you have.
If you have extensive assets and need home insurance, maybe you can afford a higher deductible to lower your costs. However, if you are the sole provider for your family, it is important to protect your loved ones by having a life and disability insurance policy that could replace your income if you were no longer able to provide. Every person’s circumstances are unique; consider your sources of income, your stage in life, who you provide for, how risky your lifestyle is, and what you can afford.
- What areas are you most likely to experience a loss?
Your lifestyle, health, dependents, and financial situation determine which types of insurance you should focus on. Are you an avid car-pooler, always volunteering to drive the neighborhood to school? Do you have the liability coverage to protect you in case of an accident? If not, you could be responsible for covering the medical expenses of everyone in your vehicle, which could drain funds from the other goals in your financial plan.
If you are single, what are you trying to protect with a life insurance policy? Do you have anyone that is relying on your income? If not, you may have no need for life insurance but disability insurance would help you bridge financial gaps in the case you could not work.
If you are concerned about depleting your resources in the case of a long term care need, having long term care insurance is something to consider. Long-term care insurance can provide assisted living and nursing financial support when you may need it.
Insurance helps you manage the risks of life, but also is a major expense. If you would like to talk further with us on how you should incorporate insurance into your financial plan, feel free to reach out. We are available at (480) 214-9596 or firstname.lastname@example.org, we offer a 30 minute no obligation consultation to assist you with these questions.
Wondering how you can protect yourself beyond insurance? Stay tuned for our article on Asset Protection. You can follow us on LinkedIn to receive notifications when we post a new article.