Most people understand that there are many types of insurance available to help protect them and their loved ones against the cost of accidents, illness, disability and death.
What many may not realize is that there are numerous factors that can change your insurance needs and affect your exposure to risk including major life events, such as a marriage, the arrival of a new baby or other events that may happen slowly over time, such as the appreciation of your home’s value.
When it comes to setting up your insurance, be sure to do your research regarding which companies to work with. Company’s such as Moody’s, Standard & Poor’s or A.M Best will rank and rate insurance companies and give you information about their strengths.
For basic types of coverage decisions, use these guidelines, but remember to review your insurance coverage each year to see if updates may be necessary:
• Homeowner’s insurance should allow you to rebuild and refurnish your home after a catastrophe or other major losses and insulate you from lawsuits (coverage for lawsuits are capped at the liability limit — Personal Liability “Umbrella” coverage provides coverage above the homeowners liability limit) if someone is injured on your property. Coverage should be at least 80% of your home’s replacement value, minus the value of the land. Unless you increase coverage, most homeowner’s policies cover the contents of the house for 50% to 75% of the amount for which the house is insured.
• Payable when you die, life insurance can provide a surviving spouse, children or other dependents with the funds necessary to maintain their standard of living, help repay debt and fund education tuition cost or other purposes. The amount you need varies depending on many factors, such as your income, mortgage and long-term savings needs for education and retirement.
Importantly, you may need to adjust your insurance coverage based on other less obvious factors, as well. Let’s say your home significantly increases in value and you take out an equity line of credit. You should also consider your life and disability income insurance coverage and ensure they are compatible with the increased liability risks you have undertaken.
• If you are unable to work for an extended period, a long-term disability policy can replace a portion of your lost income. You should consider a non-cancelable policy with benefits for life, or at least until age 65, and as much salary coverage as you can afford. According to the Insurance Information Institute, it is a good rule of thumb for disability coverage to add up to 60% to 65% of your gross salary. Generally, you should have total coverage equal to two thirds of your current pretax income.
But what if you have significantly increased your monthly mortgage payments after refinancing your home in order to get a better long-term rate? Again, this is perhaps a less obvious, yet important time when you might consider increasing your life and disability insurance to help yourself or your loved ones cover your higher monthly payments.
• With an aging population and uncertainty about the future of Social Security, insurance coverage of nursing home or at-home healthcare is becoming more widespread. Medicare pays very little of the cost of long-term care in the United States.
According to www.Medicare.gov, Medicare will pay for the care, but only for patients whose assets are almost completely depleted. Medigap insurance can help pay medical expenses of the elderly not covered by Medicare; however, not custodial nursing home costs.
In fact, according to www.Medicare.gov, about half of all nursing home residents pay for the care with personal savings. If you should need these services and do not want to deplete your personal savings, long-term care insurance is essential.
Parents, think ahead
New or expecting parents must think not only about their immediate needs such as health insurance, but also about protecting their child’s future with the parents’ disability and life insurance. A common goal is to replace the income you would generate until the child has been educated and is out of the house.
Also, you’ll want to balance the needs of your newborn, or your other insurance needs, without sacrificing your other financial goals. While it might be tempting to scale back on the 401(k) contributions, you run the risk of derailing your retirement plans to fund your insurance needs. No matter if you have children or not, be sure your protection planning and retirement planning is in synch and that your goals are rebalanced frequently based on your timeframe and changing needs.
If you are considering purchasing or updating your insurance coverage, one goal should be to buy sufficient protection without overspending on coverage you don’t need. Seek the help of a qualified financial advisor who can conduct a detailed insurance needs analysis based on your individual circumstances. An experienced financial advisor can also integrate your protection planning needs into personalized financial plan to help you best reach your financial goals and dreams.
Gary N. Garner is a financial advisor with Ameriprise Financial Services Inc. in Hattiesburg. This information is provided for informational purposes only. The information is intended to be generic in nature and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or your financial advisor. The views expressed may not be suitable for every situation. Ameriprise Financial Services, Inc., Member NASD, part of Ameriprise Financial, Inc. On or after September 30, 2005, Ameriprise Financial expects to separate from American Express Company. After separation, it will no longer be owned by American Express Company.