Financial Friday #147: Don't Overlook Insurance in Your Financial Plan!
Personal finance has many different aspects and most of what we teach focuses on methods and strategies to either generate more income, or better manage and control our expenses. A third area which doesn’t always get the attention it requires is protecting our financial assets and income streams against unforeseen circumstances.
Diversifying our investments may provide some degree of protection, but insurance is the primary tool to help us financially when the unexpected occurs. However, the details of our insurance coverage are often overlooked and many of us take it for granted that we are sufficiently protected in the case of an emergency. Reading an insurance policy is not for the uninitiated and most of us would struggle to understand one.... even if we made the effort!
Insurance can be complicated due to the many types and variations available as well as plenty of confusing jargon to go along with it. The appropriate amount of coverage required can also be difficult to determine. Most of us are familiar with car insurance and understand the coverage we have, but that certainly isn’t always the case, especially when it comes to life or disability insurance.
A survey from online insurance specialists "Policy Me" found that only 33% of parents with children under 18
had term life insurance. This was quite a surprising result given term life insurance is the most cost-effective means of protecting your family. The survey also showed that many parents rely solely on employer-provided insurance benefits that can be expensive and may not provide sufficient coverage in the case of an emergency. Others chose permanent life insurance which can be costly and complicated, especially if your financial situation is not so complex.
In addition to holding permanent (universal/whole life) insurance instead of term life insurance, other common misbeliefs are centered around mortgage life insurance and holding life insurance on your children. Mortgage life insurance actually pays off directly your creditors and not to your family, so term-life insurance would allow more flexibility for your family and may also be cheaper for the equivalent coverage.
Insuring your children with some sort or permanent life plan is often pitched as a way to save for their future, but the reality is that these plans are expensive and there are more cost effective alternatives for anyone looking to create a nest egg for their child’s future.
Your home is your biggest asset and there are also a few insurance caveats there to be aware of. Most home insurance policies now use guaranteed replacement cost. This is the amount required to rebuild your home as it was, on the same site — not the market value of your home. Make sure you have replacement cost insurance and let your provider know if you have done anything that would significantly increase your rebuild cost.
Fire is the primary threat for most homes, but we are seeing more and more flooding these days. Weather patterns are changing and insuring your home against water damage — whether the cause is overland (surface flooding) or from a backed-up sewer — is an important difference. Cost, availability and pricing will vary but you should evaluate if flooding is a possibility in your area and seek appropriate coverage.
One final caveat with home insurance is making sure you are covered if you rent your home (or part of it) regardless of whether it is long-term or short-term (like Airbnb). Talk to you agent and let them know the details of your rental situation so they can adjust your coverage accordingly.
You most likely have a lot more types of insurance than we could cover in this article, but the key takeaway is simply to be knowledgeable about your insurance products. Make sure you confirm the details of your employer benefits like life and disability insurance, and call your provider with any questions about your home, car or any overseas travel insurance you may purchase. You will get peace of mind knowing there won’t be any surprises when you least need a surprise, and you might even save yourself some money.
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