When you think of personal finance, your financial goals are likely the first thing that comes to mind. Whether that be retirement, buying a vacation home, or traveling throughout all seven continents, your goals drive your financial plan.
What individuals often don’t consider is how to actively protect those goals. That’s why we’re tackling risk management in this blog series. Over the course of this blog series, we’re going to cover:
- insurance
- building a balanced portfolio
- managing external factors (think: elections, global events, etc.)
We’re starting with the risk management quarterback: insurance. Insurance mitigates risk by providing financial protection against unforeseen events.
In this blog, we’ll break down the various types of insurance, when to review your insurance plans, and how to make informed decisions to protect your assets.
Life Insurance: Term Life Vs. Whole Life
Life insurance helps protect your family from financial loss in the event of your passing, with term life and whole life policies being the most common options.
Term life insurance provides coverage for a specific period and is often the most affordable type of life insurance policy. Whole life insurance, on the other hand, offers lifelong coverage and includes a cash value component that grows over time on a tax-deferred basis. While the cash value can accumulate over your lifetime, it typically grows at a lower rate compared to other investment options. Whole life insurance is often chosen by those who value lifelong coverage and a guaranteed death benefit.
The right amount of coverage for you and your family will depend on the financial support needed in the event of your death. This includes considerations like income replacement, debt repayment, and future expenses such as college tuition.
Understanding Your Health Insurance Options
Health insurance helps cover your medical expenses if you get sick or injured. If you’ve ever looked closely at a medical bill, you understand how expensive it is to receive even the most basic healthcare.
Individual insurance is a healthcare policy you purchase for yourself or your family, whereas employer-sponsored plans are selected and purchased by your employer. Employer-sponsored health insurance plans are often more affordable and offer comprehensive coverage due to group rates. Individual plans, while usually more expensive, provide flexibility and can be tailored to your specific health needs.
When researching health insurance, you’ll come across three important terms:
- Deductibles: The amount you pay out-of-pocket for covered healthcare services before your insurance begins to cover costs. Some services, like preventive care, may be covered without needing to meet the deductible.
- Copays: A fixed amount you pay for specific services, such as doctor visits or prescriptions, often even before reaching your deductible. Copays apply at the time of service and are separate from coinsurance.
- Out-of-pocket maximums: The maximum amount you’ll pay in a plan year for covered healthcare services. After you reach this limit, your insurance covers 100% of the costs for covered services.
From routine check-ups to emergency treatments, health insurance is vital for covering your medical expenses.
Short-Term and Long-Term Disability Insurance
Disability insurance protects and replaces a portion of your income if you’re unable to work due to a qualifying illness or injury. There are two types of disability insurance: short-term and long-term.
Short-term disability insurance covers a portion of income for a temporary period, typically up to six months. Long-term disability insurance provides income replacement for extended periods and can cover you for several years or until retirement, depending on the policy, in the event of a prolonged illness or injury.
Many employers offer disability insurance as part of their benefits package. However, these employer-provided policies may not provide adequate coverage, often covering only a portion of your salary. To bridge the gap, individual policies can be a valuable supplement to ensure comprehensive protection. Additionally, individual policies are portable, meaning they stay with you even if you change jobs, offering continued protection regardless of your employment status.
Property and Casualty Insurance
Property and casualty (P&C) insurance covers various types of insurance, with homeowners, auto, and umbrella insurance being the key categories relevant to most individuals.
- Homeowners insurance protects your home and belongings from risks such as theft, fires, and certain natural disasters (floods and earthquakes are usually not covered by homeowners insurance).
- Auto insurance is required in every state except New Hampshire and Virginia. It typically includes liability coverage for damages you cause, collision coverage for damages to your vehicle, and comprehensive coverage for non-collision events like theft or vandalism. Even in states where insurance isn’t mandatory, drivers must demonstrate financial responsibility in the event of an accident.
- Umbrella insurance provides extra liability coverage beyond the limits of your other insurance policies, offering additional financial protection in case of significant claims or lawsuits.
Insurance Planning and Review
Just as you regularly review your financial plan and adjust it to reach your goals, insurance policies require the same care and assessment. Significant life changes such as marriage, childbirth, and purchasing a home will require you to adjust your coverage.
As your life evolves, so do your insurance needs. But how much insurance do you need? It depends on your unique financial situation. An insurance professional can provide personalized advice, help you navigate the complexities of insurance policies, and ensure you have the right coverage for your personal circumstances.
Risk Management Starts Here
Insurance is a critical component of a robust financial plan and risk management strategy, offering protection and peace of mind when unexpected events occur. Understanding the different types of insurance and their roles helps in making informed decisions to safeguard your future. By incorporating insurance into your overall risk management strategy, you can better protect your assets and financial well-being.
At WDW Financial, our focus is on securing your financial future. Get in touch with our team to explore how we can help you safeguard and grow your wealth with a strategy that is tailored to your needs.