By now, you have a good understanding of your cash flow situation, you’re working on paying down debt and your emergency fund is looking good. Now you’re ready to start investing, false! For Gen X & Gen Y, risk management or “insurance planning” is the next essential item in planning. With one small caveat, you should be taking full advantage of your employer 401k match at this time.
Risk management comes before investments because of this: no matter how good your investment returns are, if you wake up and can’t go to work ever again from a disability or premature death, those “wonderful” investment returns will mean nothing! Almost every large asset requires insurance; homeowners insurance, renters insurance, car insurance, but for some reason no one wants to insure their BIGGEST asset, YOU, and the ability to wake up each morning and go to work!
Let’s touch on a few different lines of risk management:
I hope this is a no brainer, but it is a MUST for everyone!
If you’re healthy and don’t want to pay a high premium, get a high deductible plan to safeguard against any major disasters.
Health Savings Accounts (HSA) are great and carry a triple tax benefit. If you are using a high deductible plan, contribute to an HSA to help fund those deductibles.
If you don’t have dental coverage for some reason, check out Dental Savings Plans. They are a great alternative for dental coverage (just make sure you current dentist participates or you may have to find a new one).
Homeowners/Renters/Auto and an Umbrella Policy
Good liability insurance is important for your car & home coverage.
Minimum coverage should be $500,000 in liability protection.
Make sure you are covering Fair Market Value (FMV).
Raise your deductible, that’s why you have an emergency fund! This could drastically lower your premiums. Most people only have a few claims on their auto and even fewer on their home in their LIFETIME!
If you have an older car that is not worth much, drop your collision coverage. Only do this if you have enough to buy a new car after an accident.
Renters need renters insurance to cover their personal possessions; the homeowner's insurance will NOT cover personal possessions! This stuff is very cheap as well!
Umbrella policies add another layer of liability protection and is also relatively cheap.
Look for $1m- $3m in extra coverage
Once your assets surpass your current liability coverage, it’s probably time to add an umbrella policy. Also, those who spend a lot of time on the road and/or have guests in their home often should think about adding this coverage sooner.
The most underinsured and overlooked type of insurance coverage, and one of the most important!
Look for "own-occ" coverage; it covers the job you were educated or trained to do.
Get 60-70% coverage AFTER-TAX dollars
If your employer pays for your full premium, you still have to pay taxes on any benefits received! For example: if your employer pays for your entire premium and offers 60% coverage, most think they KEEP 60% of their paycheck; however, that is not the case because you still have to pay Uncle Sam. If you are in the 25% tax bracket, you are really only taking home 45% of your pay. Tough to survive on that!
Usually, employer coverage ONLY covers your base pay, no overtime, bonuses and/or commissions are included in your coverage.
The main concern is long-term disability. Short-term is still important, but not as important as long-term coverage.
Employer plans will give you the most bang for your buck; however, you sometimes want to layer a personal policy with it.
“Not So Fun” Fact: If you are under the age of 35, you have a 1 in 3 chance of being disabled for at least 6 months.
Your Number = Annual Income (10x-16x) + Debts + Funeral Costs/Medical Bills (if applicable- Kids & College Costs)
Minimum term should be 10x-16x your GROSS income
This is a MINIMUM, for some, it may be much higher!
Stay-at home-Moms/Dads need coverage too; a lot of new expenses will occur if something happens to them.
For most, term insurance is the best route. However, we can make arguments for permanent insurance for estate planning and investment strategies, such as max funded whole life, when implemented properly.
Identity Theft Protection
Welcome to the 21st century; I can promise this topic was not covered in our grandparents’ financial plan!
The key is to look for restoration services; that is the most important aspect.
At the very least, review your credit reports on an annual basis (it’s free!).
Experian, TransUnion and Equifax
Technically this is not insurance and would fall under Estate Planning; however, since 70% of Americans don’t have a Will in place, we didn’t want to miss this.
Please go visit your local Estate Planning attorney and have the following documents completed : Will, Living Will, Health Care Power of Attorney, and Durable Power of Attorney.
It’s not that expensive, an individual may spend $250 for all 4 documents and a couple may spend $500. The costs can vary drastically from attorney to attorney and from city to city.
One of the best, but most awkward conversations is when our clients (typical age range 25-45) complete their estate documents BEFORE their parents! Let that soak in for a minute, you should be ashamed, Mom & Dad!
Well that should keep you busy for a bit. Next, we will head over to investing basics or the “cool” stuff as some clients like to say.
Questions and comments can always be emailed to us. That would be a great time to ask any specifics on the items above or any other questions you have!