When was the last time you financed a new vehicle? You probably remember that the lienholder—whether it was a bank, a credit union, or the dealership’s financing company—made sure you had insurance coverage on the new vehicle. Why? Because they weren’t willing to run the risk of something happening to their valuable collateral (your new car) without a way to recover that value. By requiring you to purchase insurance, their (and your) financial risk of a total loss in value because of an accident or some other mishap is shifted onto the shoulders of the insurance company.
Similarly, no mortgage lender in the country would loan you the money to buy a home unless they were assured that you had obtained appropriate property insurance. The periodic premiums paid to the insurer mean that the insurer will absorb the risk of natural disaster or some other event that could harm the value of the home.
The fact is, risk management is one of the cornerstones of good financial planning and management. But when it comes to the personal financial plan and strategy, insurance is often one of the last things discussed.
It shouldn’t be that way. Good risk management throughout the life cycle demands that making sure you have the right kind of insurance be a central part of your financial planning. In addition to property and casualty risk as described above, most of us also face other risks that can be mitigated by the smart use of insurance.
Life Insurance: 4 Use Cases
Let’s start with an obvious one: life insurance. Most of us are familiar with the usefulness of life insurance for replacing income lost due to the death or disability of a family breadwinner. But life insurance isn’t just for breadwinners; there are other scenarios where a well-constructed life insurance strategy can provide stability and security for a financial plan.
Business continuation funding.
Suppose you started your business as a sole proprietor, but you’ve added a key partner. This can create the need for more or different coverage to provide the funds to ensure business continuity in the event of the death of one of the partners. A “key person” insurance policy can provide the funding necessary for buying out the interest of a deceased partner. It can also provide a needed financial cushion against the unexpected loss of a designer, engineer, or other employee whose specific abilities are integral to the company’s success.
Life insurance isn’t just for the primary breadwinner.
Sure, replacement of lost income is one very valuable use for life insurance proceeds. But consider: if one of the spouses, rather than working outside the home, dedicates their time to caring for children or another dependent family member, what would it cost to replace those services in the event of that spouse’s death? Someone will be needed to perform those duties so that the breadwinner can continue working, but that won’t be free. Life insurance is a very useful tool for providing a financial cushion against such catastrophic losses.
New or different financial obligations.
Have you taken on a new mortgage or a significant business loan? Have you co-signed on debt with a partner? Life insurance can provide funds to keep your loved ones from being forced to take on difficult financial burdens in the event of your passing.
Approaching retirement.
It may be surprising for some to learn that life insurance can have important implications for retirement. Many thriving retirees own cash-value policies that have long since become fully paid. While the death benefits of the policies may be less important now because of the availability of other financial resources, guaranteed cash values in insurance policies can provide significant assets to help fund a retirement lifestyle. They can also provide available capital for reinvestment.
Health Insurance: Insulating Your Finances from Catastrophic Costs
Let’s face it: all the proactive planning and portfolio management in the world won’t matter if a catastrophic illness, combined with inadequate health coverage, decimates your assets. Furthermore, as healthcare costs continue to rise—and the amount spent on healthcare typically increases with age—shifting a portion of that burden onto a health insurer is a common-sense way to preserve more of your capital for savings and investment. As you age closer to retirement, you’ll also want to explore the best ways to integrate Medicare into your healthcare funding strategy. For those with the means, it may make sense to fund a health savings plan (HSA), creating a tax-advantaged fund that can be used, in combination with a high-deductible health insurance plan, to cover qualified medical expenses.
Long-Term Care Insurance
No discussion of insurance and your financial plan would be complete without at least mentioning long-term care insurance (LTCI). We’ve written previously about LTCI and how it can provide a vital buffer for those in the later years of retirement who require assistance beyond what is provided for with Medicare or related coverage. Statistically, 70% of those currently reaching age 65 will need long-term care at some point in their lives. Because long-term care—like that provided in nursing homes or by home-health aides, for example—is not covered by Medicaid, and given the average costs involved, which can run from $50,000–100,000 per year, it makes a great deal of sense to carefully consider LTCI as part of your financial plan.
As a fiduciary financial advisor, Mathis Wealth Management is committed to providing guidance for your total financial strategy—which includes advising about your insurance needs. If you have questions about the adequacy of your risk management approach, please talk to us.
