While insurance is not always the most enjoyable topic, having quality insurance coverage is one of the best ways to reduce risk when it comes to your income, investments, or other personal property. Many people don’t think about the financial implications that can arise when you are underinsured, but the impact it can have on you or your loved ones can be significant and potentially cause more damage to your finances than say, a small dip in the market. So, what are the different types of insurance that are out there? And more importantly, what coverage do you need?
When thinking about the different forms of insurance, car insurance is probably one of the first that comes to mind. Car insurance is required by law to be purchased by every licensed driver. While having some coverage is better than nothing at all, taking the time to research your coverage options, examine the risks that come with driving or owning a car, and determining which policies would be best for you is not a simple task. To help navigate the process of finding the coverage that is best for you and the insurance company that meets your needs we’ll break down the different types of auto-insurance coverage available.
- Collison Coverage covers damage incurred in an accident.
- Comprehensive Coverage covers damage or theft outside of an accident (like a tree falling on a car).
- Bodily Injury Liability Coverage covers any injury-related expenses such as medical bills, legal fees, loss of income, pain, and suffering and in the worst case, funeral costs.
- Property Damage Liability Coverage covers any damage you may have done to another person’s car or property.
The amount of coverage you choose to purchase for each of these categories may vary, particularly if you are looking to purchase coverage for a teenager or young driver but ultimately decisions on car insurance may come down to how much risk you are willing to take on and what monthly insurance bills can fit comfortably within your budget.
If you are a homeowner, protecting your home and all its contents from theft or damage should hopefully be a major priority. However, not all forms of homeowners insurance are created equal, and not every insurance company will pay you the same for a loss. Generally, you have a few options.
- Actual Cash Value coverage is when your insurer will pay you an amount equal to the value of damaged or stolen property. This method does consider depreciation, so the amount you are likely to receive may be reduced.
- Replacement Cost coverage does not take depreciation into account. With it, you will be reimbursed for the amount it would cost to rebuild your home or replace an item of similar quality up to the limit of coverage in the policy you choose.
- Extended Replacement Cost is similar to replacement cost coverage, with a little extra. With this form of coverage, the insurance company may provide you an additional 25-50% of your coverage limit to rebuild or replace damaged or stolen items for your home. If you do decide to opt for this level of coverage, you will need to keep your insurance company informed of any improvements you make to your property to ensure your policy limit is accurate.
Whichever coverage you choose, working with an insurance agent every few years to stay up to date on the best coverage for your needs is helpful.
While thinking about our own mortality isn’t the most comfortable, the thought of a loved one struggling financially because you didn’t have the coverage you needed with life insurance is also unsettling. Life insurance pays a tax-free death benefit to a beneficiary following the death of the insured individual. If you have people in your life who depend on you financially, then you should absolutely consider getting life insurance for as long as you will be depended on. As a general rule of thumb, you should aim to have enough life insurance that through investment growth alone could replace your after-tax income.
Income Replacement Calculation for Life Insurance
$50,000 / 5% =$1 million
$100,000 / 5% = $2 million
$200,00 / 5% = $4 million
$300,000 / 5% = $6 million
If your family is nearing retirement, the need for life insurance may decrease slightly since the number of income-producing years is less than that of younger families. Multiplying by the number of years you expect to work by your annual after-tax income should be enough to cover expenses and savings until retirement for your loved ones.
Long-Term Care Insurance
Again, not always the most comfortable topic to have top of mind as you look to cover your insurance bases, however, long-term care insurance is commonly overlooked. Planning ahead in life and thinking about what you will need when you are older should help you in the long run. Long-term care insurance provides benefits for nursing-home care and personal or adult care for individuals with a chronic or disabling condition. Nearly 70% of those turning age 65 will expect to use some form of long-term care insurance in their lives, so having a game plan in place to prevent your family from having the emotional and financial burden of finding care should you need it is key.
What’s one of your greatest assets? You. Working and generating income for yourself and your family is a huge responsibility. Should a situation arise where you become disabled or are no longer able to work, disability insurance will cover that valuable income you work so hard to generate for a period of time. Disability insurance policies can cover anywhere from 50-70% of your income and there are several considerations to keep in mind when picking a disability insurance plan, so take the time to consider if it is worthwhile for you to invest in – particularly if you have people in your life who rely on your income.
Regardless of where you are at in life, whether you have a family, are nearing retirement or just starting out in your career, covering your bases and obtaining quality insurance where applicable to you may save you some major headaches and money in the long run.
If you have any questions or would like to review your insurance needs with one of our advisors, please feel free to connect with us.
Important Disclosure: Beacon Pointe Advisors does not offer legal or tax advice. Please consult with the appropriate tax or legal professional regarding your circumstances. This information is not intended and should not be relied upon as individualized tax, legal, fiduciary, or investment advice. Only a tax or legal professional may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement any design discussed herein. Nothing herein should be relied upon as personalized investment advice, nor should it be considered an individualized recommendation, offer or solicitation for the purchase or sale of any security or to adopt a specific investment strategy. An investor should consult with their financial professional before making any investment decisions.
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