Hearts and Flowers and Finance
We are told that February is the month for romance, love, and Valentines. So how do you take care of your love and your loved ones? Candy and flowers are nice, but how do you take care of them for the rest of the year, the rest of their lives? One word: insurance.
The key principle of insurance is that you transfer the risk of losses that you cannot afford to cover on your own to a third party, for a price. If you can afford to replace the item or cover the loss on your own, you do not need to insure it. Thus home insurance makes sense, toaster insurance does not.
Often employers offer insurance as a benefit or provide additional coverage for a cost. This is often the most economical way to purchase insurance. When buying any type of insurance, get quotes from several companies before making a decision, as the potential savings will be worth the effort. Consider using the same company for multiple types of insurance (for example, home and auto insurance), as there are often discounts for doing so.
Life and disability insurance: If you have dependents, you will need to make sure your family is taken care of when you are gone or incapacitated. How much to buy is based on your financial situation and the age of your dependents. There are a number of insurance calculators available online that take you through the items to consider, like funeral expenses, living expenses, outstanding debt, and education funding. On the flip side, if you do not have dependents and have enough saved to cover your funeral expenses and outstanding debt, you don’t need life insurance.
Home insurance: For most, our home is our single biggest asset, and needs to be protected from loss. If you have a mortgage on the home, you will be required to get adequate insurance coverage. And in the wake of hurricanes like Sandy and Katrina, it is evident that some need flood coverage as well, which is not covered by most standard policies. Don’t forget coverage for individual items like jewelry, art, and antiques, which should be documented, with receipts and photos on file. In this litigious world, you may also consider umbrella coverage, just in case you or a family member gets sued.
Health insurance: A Harvard study noted that 62% of all personal bankruptcies were caused by serious illness, a sobering statistic which will hopefully improve under the new Affordable Care Act. Under the Act, we will soon be required to obtain health insurance, either through our employers or on our own. The coverage we obtain will be more comprehensive, and will cover preexisting conditions. The Act will be gradually implemented this year through 2014, so stay tuned. A helpful website to keep informed of the changes that impact you is www.healthcare.gov, managed by the U.S. Department of Health and Human Services.
Auto insurance: We are all required to carry liability insurance on the cars we drive. The question is how much optional coverage you should get, and how high the deductibles should be. You should choose deductibles at the highest level you can pay out of pocket (and drive carefully!), and the optional coverage is based on the age of your car and its value. Review your insurance coverage at renewal time to make sure the decisions still stand.
Insurance as an investment option: Here is where extreme caution is advised. There are numerous insurance products like annuities that promise guaranteed returns, complex insurance strategies used in estate planning, and other creative products that should be approached with a wary eye. Many carry hefty up-front sales charges, annual maintenance fees, and high cancellation fees if you change your mind before certain minimum periods. If you are considering buying insurance products as investments, you need someone you trust to help you navigate through the choices. “If it’s too good to be true, it probably is”. So true.
Ina Fernandez, CPA is Managing Director at Liberty Capital Management, Inc.