In this episode of The Science of Economic Freedom, “What You Need to Know About the Insurance Policies You Need,” you’ll learn:
• What defines a life insurance policy
• Why it is a tool of protection for others
• How to assess/calculate if you have enough life insurance
• The ABCs of liability insurance (home, auto, small business, property, etc.)
• When you might need an “umbrella” insurance policy
• Disability insurance, and who needs it
• Long-term care insurance policies, and the issues surrounding them
Do you have the right amount of life insurance coverage? Are your liabilities and obligations covered by a life insurance policy to take care of those you are responsible for? Is it time for an umbrella policy? What about long-term care or disability? We cover it all on this episode of The Science of Economic Freedom. The Science of Economic Freedom is intended as an investor education resource.
The views and opinions expressed on this program should not be construed as a recommendation to buy, sell or hold any specific security. Consult your investment advisor and read any investment prospectus carefully before making any changes to your investment portfolio.
This program is sponsored by Mercer Advisors. Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment related services. Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Welcome to the Science of Economic Freedom. I’m your host, Doug Fabian.
This podcast is all about helping you achieve your financial dreams. We call that economic freedom. This program is about your journey to achieve economic freedom for yourself and your loved ones. Today, we want to help you identify your next step on that journey.
This is Episode 11. What you need to know about the insurance policies you may need on the path to economic freedom. This is the 11th episode of our introductory material. The last installment of the basic information and knowledge you’ll need to progress down your road to financial freedom. Let’s talk insurance. For most of us, our first experience with an insurance company was auto insurance. As teenagers, we could not believe the cost, the frequency and the lack of coverage.
This was an expensive addition for the right to drive a car. Without it, there would be no driving and coverage came with some sort of deductible if we had collision insurance on our car, a complete bummer. Today, we understand, an auto accident, if others were hurt badly, could be financial devastation. Our life savings could be wiped out and then some. We could be saddled with medical coverage for others, property damage and owe the lender for our destroyed car.
Now, here are some conclusions. We must ensure others health and well-being if we place them at risk. In addition, we must ensure the property of others if we are liable for damage or loss and we must insure any debt we take out if the asset could be damaged or destroyed. For today’s discussion about insurance, we’re going to be talking about the following, life insurance, property and casualty or liability insurance, long-term care and disability insurance. We will not cover health insurance in this broadcast.
Insurance in general is for what you can’t afford to lose or for someone you may be responsible for. Let’s go through some definitions. Insurance is defined as coverage by contract in which one party agrees to indemnify or reimburse another for the loss that occurs under the term of that contract. Libel means legally responsible. Liability means debts or obligations that relate to money or a contract. Some insurance policies and coverages are required, others are optional.
Our discussion today is to help you determine which policies may be applicable to you. This is general information. We are not making a recommendation to buy or cancel any insurance policy. We want to empower you to make these decisions, and, if necessary, get additional information to determine your best course of action.
So, here it is. The who, what, when, where, why and how insurance relates to you and your journey to economic freedom. Let’s start with life insurance. Life insurance in its most basic form is insurance for others, your spouse and your kids. It should cover your liabilities and lost future income. Get married and buy a house, get life insurance. Why, most likely your spouse may not be able to afford the house payment if you were not there. Have kids, another reason to get life insurance. Life insurance should be considered on both parents.
Child rearing is expensive. If you were to lose one parent, the financial burden on the other parent is huge. How much life insurance? There are many ways to calculate your needs but here are a few simple formulas. 10 times your annual income, this is a starting point. Another way to calculate, add up all your debts, cost of college and/or any other future liability you may have and then add to that, the income your family needs to live in the lifestyle they have grown accustomed. Life insurance’s purpose is to cover the loss of future income.
Now, there are many types of life insurance policies. For most, term insurance is the right solution. There are cash value policies but these should be considered in special circumstances. When you buy life insurance, buy when you’re young. Buy in 20 to 30-year blocks or terms. You should consider this coverage until you reach retirement age or when you have accumulated enough assets to self-insure. If you have kids, are married, own a home, own a business or are financially responsible for the well-being of another, you should have life insurance.
Now, next up, liability insurance policies. These would include homeowners’ policies, renter’s insurance, automobile coverage and umbrella policies. When you are liable, you are financially responsible. This is obvious when it comes to your home or your autos but liability can go much further. If you own a business, there could be many situations that you are liable for. Employees, customers, property, property of others and liability for you and your employees’ actions. Liability insurance is a necessary cost of success.
Homeowner and automobile liability policies are required. Minimum coverage is usually spelled out by the lender but there are features of a policy that can change the coverage and the premium. The amount of coverage spells out the amount that a claim will be paid. Policies could have deductibles. This is a variable feature that you can adjust to change the premium. Raise the deductible, this is the amount you pay out of pocket and you lower the premium.
Once you have achieved a certain level of net worth, you may want to consider an umbrella policy. A one-million-dollar umbrella policy would make sense if you earn more than $100,000 a year and/or have assets of more than a million dollars. These are liability plans that add more coverage over and above your auto and homeowner policy, to add to your existing coverage.
These are usually written by the homeowner’s insurance company that you’re doing business with. Now, let’s move on to disability insurance. In general, disability insurance may begin with your state’s general disability coverage. Some states require that employees pay into a general fund that has some basic coverage. Check with your state regarding your disability options. And maybe your company offers some short-term disability coverage.
If you’re going to purchase a long-term disability policy, the cost is going to depend on your career, your income, your skills and the circumstances of your ability to continue to work. For example, if you’re a dentist and you can no longer perform your job as a highly paid health care professional, the cost of such a policy will be expensive. Those with specialized skills need to research what options they have for coverage and the costs associated with those policies.
Disability insurance is expensive because it is income replacement. Lastly, let’s talk about long-term care. Now, most people self-insure for long-term care. Long-term care is costly and requires a commitment of cash flow if you desire this coverage. You could pay for it and never need it. Long-term care is a type of insurance that is completely discretionary. If you want it, you will need to research your options and pay for it.
The issues to consider when purchasing, what is your family’s health history? Has there been a need for long-term care with your parents or your siblings? Will you be able to maintain the cost of coverage when you need to pay for it for 20 or 30 years in order to be able to get the benefit? The cost of coverage may go up by some factor, inflation, and coverage may come down. Most of our clients consider the equity in their real estate as a long-term care policy. One final thought on long-term care, if you have a policy that was issued before the year 2000, it is most likely a policy you want to maintain.
Now, since the year 2000, policies have changed, coverage has changed, costs have gone up. Let me summarize the action steps from this discussion about insurance. Let’s begin with life insurance. Life insurance is income replacement for those you are financially responsible for. Do you have life insurance today and do you have the right amount of coverage? Sit down with your spouse or business partner and discuss your coverage and your needs.
Next, liability insurance. Most likely, you already have coverage for your auto and your home but what about an umbrella policy? Is it time to increase your coverage to fully insure all of your assets? Long-term care and disability are coverages you may want to consider depending upon your circumstances and cash flow. Speak to an insurance advisor for more details. I want to remind you again, my email address is [email protected], [email protected]. This is Doug Fabian. Thank you for listening.
The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell or hold any specific security. Consult your investment advisor and read any investment prospectus carefully before making any changes to your investment portfolio.
This program is sponsored by Mercer Advisors. Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment related services. Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services.