We all face risk--the possibility of injury, illness, death, or property destruction--each day. Although you may never be able to eliminate risk, you can protect what’s important with insurance strategies that help mitigate risk by working with an insurance company that’s in the business of dealing with risk. In return for your payment of premiums, your insurance company agrees to pay you (and/or others) a certain amount of money for a specified loss. This loss may or may not occur, so both sides assume risk. Still, the potential benefits of insurance may be well worth the cost.
There are many different types of insurance to consider. These include life, medical, disability, long term care, auto, and homeowners, to name just a few. You may want to purchase additional coverage to help protect your assets and if you have an employer that provides you with one or more forms of insurance coverage, you may want to supplement this coverage with an individual policy.
Consider the possible losses associated with each risk you identify with. For example, assume you have a spouse, two minor children, a mortgage, and various debts and expenses. If you die within the next few years, how much money will your spouse need to pay off the debts, meet expenses, and perhaps even send the children to college? Or what if your 68-year-old spouse (or parent) suddenly suffers a stroke and requires around-the-clock care in a nursing home? How will you pay for it? You can help mitigate some of your risks with various insurance products.
You should probably consider buying life insurance if anyone of the following is true:
- You are married and your spouse depends on your income
- You have children
- You have an aging parent or disabled relative who depends on you for support
- Your retirement savings and pension won't be enough for your spouse to live on
- You have a large estate and expect to owe estate taxes
- You own a business, especially if you have a partner
- You have a substantial joint financial obligation such as a personal loan for which another person would be legally responsible after your death
In these cases, the proceeds from a life insurance policy can help your loved ones continue to manage financially during the difficult weeks, months, and years after your death. The proceeds can also be used to meet funeral and other final expenses, which can run into thousands of dollars.
Cost is always an important consideration. Even if you appreciate the importance of disability insurance, you may be unable to afford it. In addition, you should weigh the price of insurance protection against the potential benefits to you. For example, the chance that your dilapidated10-year-old auto will be stolen is remote--and even if it is stolen, your financial loss would not be great, so theft coverage would be a waste of money.
Once you decide you need life insurance, don't put off buying it. Although no one wants to think about and plan for his or her own death, you don't want to make the mistake of waiting until it's too late.
Once you purchase a life insurance policy, make sure to periodically review your coverage--especially when you have a significant life event (e.g., birth of a child, death of a family member) --and make sure that inadequately meets your insurance needs. The most common mistake that people make is to be underinsured. For example, if a portion of your life insurance proceeds are to be earmarked for your child's college education, the more children you have, the more life insurance you'll need. But it's also possible to be over insured, and that's a mistake, too--the extra money you spend on premiums could be used for other things.
An insurance-needs analysis can be pretty complicated, it may be best to sit down with your financial advisor or insurance professional to figure out what types of insurance policies you should buy and how much coverage you actually need.
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