A Year of Financial Fitness: How Much is Enough? … Protection

by | Apr 1, 2012

Moving along the months of our year of financial fitness, we explore this month the topic of Protection, commonly known in financial planning as insurance. Insurance protection arises in various forms to assist with protecting different aspects of life. The focus this month includes all forms of protection for assets, tangibles and earning power.  For now I am excluding health-related insurance; I will cover this significant topic another month.

[Please note:  there are many “moving parts” related to insurance. My intention is to offer just enough – my belief for insurance – so that you are informed and can follow up where necessary with professionals. There are many nuances and particulars that cannot be covered here.]

In this article, first I will offer some quick definitions, then I will share with you my personal philosophy about insurance.  Finally, I will discuss each type in more detail.

Property & Casualty insurance: protects the “stuff” you own.  This insurance includes homeowners, automobile, marine and renters. These policies protect your tangible assets, your home, automobile, and personal chattel.

Life insurance protection is for survivors in a family or business.  The purpose of life insurance varies from situation to situation.

Disability insurance protects your ability to earn a living in the event you are physically or mentally incapable of performing your job.  The insurance would pay out benefits in this situation.  The insurance is protection for individuals while gainfully employed and protects earnings in the event of disability.

Personal liability insurance is protection of assets and earnings in the event of a lawsuit or settlement.

Before we delve into the details of insurance protection, allow me to reveal my bias, and an interior truth about “protection.”  First, my bias is to protect just enough and not a penny more.  For personal property, it is illegal to receive money beyond the property value. This same limit does not apply to other types of insurance. Because of that, many over-insure which usually means paying more for little to no benefit.  This bias means that each informed individual has a tipping point in their internal risk barometer. After gaining insight on your individual risk “tipping point,” allow this interior barometer to be your guide for protection and obtain just enough rather than adopting a “more than you need but it doesn’t hurt” posture.

The second point relates to protection and the false sense of security that can arise with insurance coverage. There is no exterior, practical protection from the interior fears, worries, concerns that drive us as humans. In order to access peace, serenity and truth, there are practices, such as meditation, that help to face your relationship with risk, reward and uncertainty.

In this light, let’s return to these important practical matters of insurance protection, one at a time.

Property & Casualty

The two common property and casualty policies are homeowners and automobile. Homeowners insurance includes these areas: all risk coverage (all risks included) or named peril coverage (specific risks identified), replacement cost, valuation of home and personal property, settlement basis, catastrophe exposures and flood insurance, premises liability, additional living expenses, rebuilding to code, and debris removal. Reimbursement for damages can be in the amount of actual expenses or just for damages. Most often, the insurance company determines which version you receive and the consequences can be substantial.   Access this link for more details.

Automobile insurance includes these areas: Liability, Collision, Comprehensive, and Medical Coverage. PIP – Personal Injury Protection, Uninsured Motorist, Underinsured Motorist, Rental Reimbursement. Follow this link to learn more.

Questions to ask:

Does the policy contain All Risk coverage for home and contents?

Does the policy have extended replacement cost? What’s the percentage of the extension or is it unlimited?

How is the value of the home derived?

Does the policy include replacement cost coverage for personal property?

Does the home have potential exposure to a catastrophe such as flood, windstorm, earthquake or wildfire and if so, are the proper coverages in place?

What are the policy limits for additional living expenses, rebuilding to code and debris removal?

Life

Life insurance is owned for one or both of the following basic reasons: 1 – to provide estate liquidity, i.e., funds to pay estate taxes and expenses; or 2 – to create enough income for the surviving members of the family to maintain the household for their lives. In order to satisfy a life insurance need, you can choose from four classes of life insurance: term, whole life, universal life, and variable life. In terms of need, many persuasive reasons to sell life insurance have arisen by insurance companies, over the decades, and they are sometimes designed to capitalize on fear. Once you determine there is a need, there will be many compelling questions to investigate about the type of insurance.  Again, find your tipping point barometer to help guide your decisions.

Questions to ask:

What am I purchasing this life insurance for, exactly?

Are there survivor income needs?

Are there any lump sum needs, such as college education, that I want to ensure are covered?

Are there estate taxes (state and/or federal) that I want to cover in my plan?

Who or what is the best beneficiary?

How should the policy be owned?

Disability

One of your most valuable assets is your ability to earn income.  Statistical evidence shows that the probability of becoming disabled in a young person’s lifetime (age 20-55) is more likely than the probability of dying.  As long as you are physically and mentally capable of generating income, you have little incentive to consider disability.  However, if you become disabled, you will be relying upon different income sources to provide for your existence.  Access this link for more details about private disability insurance (versus public insurance through social security).

Questions to ask:

What coverage do I currently have, if any, from my current place of employment?

What amount could I obtain on my own?

Is the cost benefit worth it?

Personal Liability Protection

Liability protection is coverage that an individual purchases to protect current assets and future earnings in the event of a covered lawsuit or settlement.  In addition, it is coverage for damages caused by a covered person for bodily injury (personal injury) or property damage, which takes place anytime during the policy period and is caused by an occurrence, unless stated otherwise or an exclusion applies. The types of liability insurance include: primary liability (on home or car); excess liability (once the underlying coverage is met, the excess kicks in). Umbrella liability follows the form of the excess liability.

Questions to ask:

How much coverage do I need? How much do I have to lose?

What excess liability limits are available from the insurer?

Are the underlying limits adequate?

Does the personal liability policy provide:

  • Worldwide liability?
  • Personal injury?
  • Defense costs outside of the policy limit?
  • Non-profit directors and officers liability coverage?

 

Please note, the above information is for general purposes only.  If you have a specific question you are encouraged to seek advice from your insurance agent.