{"id":966,"date":"2013-06-18T21:16:33","date_gmt":"2013-06-18T21:16:33","guid":{"rendered":"http:\/\/vhfinancialmanagement.com\/?p=966"},"modified":"2013-06-18T21:22:22","modified_gmt":"2013-06-18T21:22:22","slug":"dont-risk-a-lot-for-a-little-why-we-have-insurance","status":"publish","type":"post","link":"https:\/\/vhfinancialmanagement.com\/2013\/06\/18\/dont-risk-a-lot-for-a-little-why-we-have-insurance","title":{"rendered":"Don’t Risk a lot for a Little (Why we have Insurance)"},"content":{"rendered":"
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Why do we have (or should have) insurance?\u00a0 There are many answers to this question, but, unfortunately, not everyone answers the question correctly.<\/p>\n

Some folks might say I have insurance because the state requires certain limits for my auto policy. Some folks might say I have insurance so that my spouse can live like a king or queen if I die, or others may say I have insurance because someone sold a policy to me.<\/p>\n

Insurance has many functions in our financial puzzle: income replacement, liability protection, estate planning purposes, and protection. Understanding the right types of policies and amounts of coverage is critical, not only, for financial success but also for a good night\u2019s sleep.<\/p>\n

Income Replacement<\/span><\/b><\/p>\n

The need to replace income comes in two forms: income replacement for the loss of life (loss of earnings) and income replacement due to disability (also loss of earnings). These two needs can be solved by purchasing life and disability insurance, but the problem lies in knowing how much life insurance is enough, as well as, navigating the intricacies of disability insurance.<\/p>\n

A simple term life policy is the answer in most cases to cover the life insurance need, but, unfortunately, using a simple formula (such as 10 times earnings) may not get you to proper life insurance amount.\u00a0 A holistic, big picture analysis is needed to capture all the factors involved with life insurance planning.\u00a0 The answer doesn’t get solved by over-purchasing life insurance either.\u00a0 If you have too much life insurance it can be inefficient and the equivalent of buying a lottery ticket.\u00a0 Remember the ultimate goal of life insurance (in most cases) is to replace the income of the decedent\u2026.not to make the beneficiary wealthy.<\/p>\n

Disability is a difficult type of insurance policy to understand, especially if you are purchasing an individual (not a group) policy.\u00a0 Understanding the vernacular can be a challenge.\u00a0 Waiting periods, occupation classes, payment periods, and other lingo can certainly make our head\u2019s spin when it comes to evaluating a policy. \u00a0A careful, unbiased review is certainly needed to find the right policy.<\/p>\n

Liability Protection<\/span><\/b><\/p>\n

It\u2019s important we protect our assets. One way to achieve that goal is by covering ourselves against liabilities.\u00a0 For example, driving a car exposes us to a potential liability. If we cause an accident that produces $100k of damages, we need to cover ourselves against that potential liability.\u00a0 We do that (or should do that) through insurance.<\/p>\n

The old insurance axiom of \u201cdon\u2019t risk a lot for a little\u201d rings true here.\u00a0 Having the proper amount of auto insurance (as well as other property and casualty insurance) is critical\u2026..not the minimum limits the state tells you to carry!\u00a0 Remember, if you cause an auto accident and your insurance doesn’t cover the damages, you could be party to a personal lawsuit, which could deplete your hard earned assets.\u00a0 We should cover our potential exposures through insurance.<\/p>\n

Estate Planning<\/span><\/b><\/p>\n

There are a few instances where insurance can come into play for estate planning purposes.\u00a0 The most common is to cover an estate liquidity issue. Estate tax liquidity refers to the cash needed to cover estate taxes.\u00a0 For ex, someone who owns a highly valuable asset (such as a family farm) may not have the cash to cover the estate tax liability.<\/p>\n

Here are some numbers:<\/p>\n

Family Farm = $10M<\/p>\n

Additional Assets $250,000<\/p>\n

Estate Tax Exclusion = $5.25M<\/p>\n

Taxable Estate = $5M<\/p>\n

Tax Due = $2M<\/p>\n

So, in this example, a family farmer may have a valuable piece of property in which they farm for a living.\u00a0 If the owner dies, the estate could owe as much as $2M in estate taxes.\u00a0 I don\u2019t know too many farmers with $2M sitting around ready to pay estate taxes.\u00a0 While the property is valuable, the family may not want to sell the property just to cover the taxes due.\u00a0 In some unfortunate cases, it may be the only choice, but having a life insurance policy in place to cover the $2M hit is certainly a possibility.\u00a0 This tactic would then preserve the family farm.<\/p>\n

Protecting Property<\/span><\/b><\/p>\n

We have all worked hard for the things we own.\u00a0 Our home, cars, jewelry, and other personal possessions are valuable to us.\u00a0 We must protect them. Again, don\u2019t risk a lot for a little.\u00a0 It\u2019s much easier to pay $1500 a year for home owners insurance than it is to rebuild the $500k house from scratch.<\/p>\n

This type of insurance is in place simply to cover the loss of an asset.\u00a0 What if you lose your wedding ring? Is it insured?\u00a0 It should be!\u00a0 What if a tree fell on your home and car at the same time? Are you covered?\u00a0 You should be!<\/p>\n

Insurance is an important piece of our financial picture, and it\u2019s important to understand what and how your assets \u00a0needs to be covered.\u00a0 Simply using the state minimum requirements is a disaster waiting to happen.\u00a0 Haplessly buying a policy without understanding the intricacies is risky.<\/p>\n

While the above areas of insurance do not cover the entire range of insurance needs and applications, the message is simple: don\u2019t risk a lot for a little!\u00a0 If you don\u2019t understand insurance (and most people don\u2019t), it is invaluable to work with someone who does.\u00a0 A fee-only financial planner is great place to start.\u00a0\u00a0 The Alliance of Cambridge Advisors (ACA) is a wonderful, not for profit, organization of fee-only financial advisors who can help you understand your\u00a0 true insurance needs.\u00a0 You can find a local ACA advisor here<\/a>.
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Disclosure: Troy Von Haefen, CFP(R) is not an attorney and the above information does not constitute legal advice but is written for informational purposes only.<\/p>\n

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