Protecting Your Finances with Insurance

Enter insurance policies. They’re among the few products you buy with the hope you’ll never have to use, but a collection of policies is often vital for managing a sudden crisis with the potential to cause financial harm, such as a medical emergency or car accident.

Read on for a quick guide to some of the most common types of insurance and when you’ll most need them.

Life

No one wants to think about it, but a significant part of protecting your financial health is considering how you’ll support your family when you’re gone. Primarily, you can do that through a life insurance policy, in which you pay a premium to an insurer in exchange for a sum of money to be paid during a set period or upon the death of the insured person. That sum can vary greatly depending on the age of the insured, their profession, personal health and earnings potential.

Basically, life insurance comes in two varieties: term life and permanent (or whole) life. Determining whether you want one type or the other or a combination is your first step.

• Term life: These policies provide coverage for a certain number of years (the term) and generally pay a death benefit if you die during the policy’s term. Term insurance doesn’t build cash value. If you outlive the term, the policy lapses and your beneficiary gets nothing. Generally, term life costs less than permanent life, although premiums may increase over time.
  
  If your main reason for buying life insurance is to ensure your family’s financial wellbeing for a finite number of years — until your children are out of college, for example — term life may be a good option.
  
  
• Whole life: Along with providing a death benefit, permanent (or whole) life insurance builds cash value, but the premium typically costs more than term life.
  
  There are three basic types of permanent life insurance. Traditional whole life offers minimum guaranteed cash values and death benefits. Universal life is similar, but premiums can vary from year to year and policies earn interest at a rate determined annually. Variable life has a guaranteed minimum death benefit, but cash value depends on investments you select for your policy.

It’s natural to consider an injury or illness and think “but it won’t happen to me.” According to the Social Security Administration, however, a quarter of the U.S. population may face with a disability between the age of 20 and when they retire¹. Should a person be unable to work because of their disability, an employer or the government may be able to provide some assistance, but a disability insurance policy can offset some loss of earnings. There are two primary types of policy:

• Short-term: This policy replaces a higher percentage of your salary and may have a shorter waiting period after you become disabled to collect benefits. However, the benefits are paid out only for a set period, with the length depending on the policy.
  
  
• Long-term: While this replaces a lower percentage of your salary and has a longer waiting period, the benefits are paid out for the duration of the disability, after a much longer period than short-term or at retirement age.

Vehicle

For many of us, our first experience with an insurance policy is with our vehicles. In nearly every state, some level of minimum coverage is required — New Hampshire and Virginia are the exceptions. Additionally, it can be more costly to not have insurance than to pay an annual premium that protects your finances in the event of an accident. Depending on the level of coverage, a policy can cover property damage, injury to another driver (in the event the accident is your fault), personal injury and costs if another driver is at fault but uninsured or underinsured.

Homeowners

Few, if any, assets you own will be more valuable than your home and its contents. Unlike vehicles, homes are not required to be insured by state law, but they often are by your mortgage lender. Typically, a policy packages multiple types of insurance, such as coverage for structural damage, fires or theft. Specialized policies, meanwhile, may be necessary in areas prone to flooding, significant wind damage or other natural disasters and unique circumstances.

Umbrella

The majority of insurance policies have limits, be it on claims amounts or what types of damages they will cover. In the event of a catastrophic business loss or for high net-worth individuals with substantial assets, umbrella insurance policies can be a lifesaver by supplementing underlying base policies. The coverage provided can exceed regular liability limits and potentially add coverage for other specific circumstances, such as damages the policyholder is responsible for or legal fees.

Covering yourself

Insurance isn’t the most glamorous expense in your life. In a perfect world, you’ll never need to use a policy, but few of us are so lucky. Fortunately, most of our valuable assets can be insured in the event of the unexpected, even luxury items like jewelry and art.

Ultimately, a range of insurance policies are vital pieces in any well-rounded financial planning strategy. They are among the most important tools we have to protect our long-term wealth, not only for ourselves but our families.