Prioritize Your Insurance Needs
It may be frustrating to watch a significant part of your budget be devoted to insurance premiums — particularly if you never need to file claims. But that doesn’t mean you’ve wasted your money.
Your psychological health may be at stake if you just roll the dice, don’t buy optional insurance and hope for the best. Being uninsured is financially — and, in some cases, legally — risky. Having an appropriate amount of insurance does provide some peace of mind that you’ll be covered in an adverse situation.
Also, if you decide to hold off too long on buying certain kinds of insurance, you might find that it’s no longer an option, or at least not at a price you can afford. For example, because health issues may rise over time, it can be harder to qualify for a life insurance policy.
Before making some decisions about insurance, here’s a quick review of key insurance categories (excluding health policies):
Life insurance. You probably already have some, but do you have enough? And is it the right kind for you? There are many choices, based on your need for coverage and financial situation.
Property-casualty. This includes policies covering your car, home, personal articles (such as specific jewelry, art and antique items) and “umbrella liability” policies that provide higher coverage amounts when purchased in conjunction with auto and homeowner policies.
Long term disability (LTD). LTD replaces a portion of your income if you’re no longer able to work. As the name suggests, it kicks in after short-term disability insurance ends (typically after three or six months) and often is provided by employers. LTD can last for a fixed number of years, or up to the time you retire.
Long-term care (LTC). This can cover some or all of the cost of personal care, either at a nursing home or in your own home, if you’re unable to care for yourself. This coverage is sometimes also available through hybrid life insurance policies. In general, only those with no assets qualify for government-financed long-term care.
Note: This isn’t an exhaustive list of personal insurance categories. Policies are also available for more specialized risks. Insurance professionals can give you the complete rundown.
Deciding what to buy, and how much of it, boils down to your income, assets, personal circumstances and risk tolerance. But the key to sound risk management is taking a methodical approach. First, rank your risks. Then review the costs of each kind of coverage and the options you have to increase — or decrease — insurance coverage over time.
Is Cheaper Better?
In general, the less expensive a policy is, the less likely, in the insurance company’s experience, that you’ll actually file a claim. For example, LTC insurance tends to be relatively expensive because if you maintain the policy for many years, the probability that you’ll need it is relatively high. LTD policies can also be fairly expensive for the same reason.
In contrast, the cost of term life insurance for young adults without serious health issues is generally cheap. However, that’s no reason to not buy a life policy if you’re relatively young and have a mortgage and your income is essential to keeping your family afloat. Also remember that if you postpone buying life insurance until you’re older or ill, it may no longer be a bargain — or even an option. Locking in lower premiums in a “level” guaranteed renewable term policy can help you avoid that scenario.
Timing Your Purchase
It’s possible to buy some policies, particularly LTC insurance, too early. That is, even with lower premiums, you might not come out ahead in the long run. It may make more sense to buy an LTC policy in middle age, even at a higher price. Finding the “sweet spot” of when to buy coverage requires some number crunching and guesswork.
Another consideration is that the cost of insurance can go up or down based on factors out of your control. For example, at a time when lots of insurance companies are competing for the same kind of business, you’ll see some bargains. On the other hand, if insurance companies see their investment portfolios struggling due to a prolonged period of adverse market conditions, they’ll have to make up for it by increasing premiums, or simply writing fewer new policies.
In other words, there are many “moving parts” in sorting out and addressing insurance needs. The more you understand about your own risk exposure and risk tolerance, and available insurance coverage, the better equipped you will be to exercise sound risk management.
Kirsch CPA Group can guide you in making the right choice. It may be necessary to revise your budget so that you can secure the insurance coverage that will reduce risk and preserve peace of mind.
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