5 Types of Insurance to Protect Your Income, Wealth and Family

The topic of insurance can bring up tough conversations. No one wants to think about the possibility of not being able to take care of ourselves or our dependents. But the path to financial freedom involves both building wealth and preserving wealth.

Today's young workers have a 1 in 3 chance of becoming disabled or dying before they reach retirement age. So how can you be sure that you are protecting your wealth while you build it? It is important to review your insurance policies and make sure you have adequate coverage.

Here are five types of insurance you should consider:

1. Life Insurance

This insurance protects anyone who relies on your income or your work. The rule of thumb for life insurance is to be insured for 10 times your regular annual living expenses. However, you also may want to consider insuring for:

• Outstanding debt (mortgage, auto loan, student loans).
• Retirement needs (so your spouse can retire comfortably).
• Education funding for your children.
• Funeral expenses.

Consider insuring both spouses, even if one is a stay-at-home spouse. You can easily translate the stay-at-home spouse's value to dollars, such as the cost of childcare, cost of cooking, cost of cleaning and more.

2. Disability Insurance

You are far more likely to become disabled than you are to die early before retirement. There are two common types of disability insurance:

• Short-term: benefits last approximately 3-6 months
• Long-term: benefits last anywhere from around 2 years to life

If you have a well-funded emergency fund, you may be able to self-insure and skip the short-term disability insurance.

The important thing to pay attention to with disability insurance is the wording. Commonly there is either “any occupation” or “own occupation” coverage.

“Any occupation” disability insurance will pay out only if you are unable to work in any job for which you are reasonably qualified. So, if you’re a surgeon and lose function in your hands, the insurance company may argue that you are reasonably qualified to work the front desk.

If you’re a professional or a specialist, you typically want “own occupation” insurance coverage. Own occupation disability insurance will pay out if you are unable to work in the role you were working in prior to your disability. Own occupation is more expensive but often worth it to maintain wealth.

3. Home Insurance

For many people, their home is their largest asset and source of wealth. To protect this asset, you need to understand your home insurance.

Home insurance coverage generally includes limits for the following:

• Main Dwelling: This covers your house and everything attached to your house, such as a deck or garage. Make sure this accurately reflects the current value of your house.
• Other Structures: These are structures not attached to your house, such as a detached garage or shed.
• Personal Property: This covers the things inside your home, such as furniture, clothing, electronics, etc. Note that it may not cover the full value of the things inside your home. If you have expensive items, you most likely will need additional coverage through a rider or separate policy.
• Loss of Use: This will cover the cost of going to a hotel or renting a place if you cannot live in your home (during repairs).
• Liability: This will cover you against claims if someone gets hurt on your property.
• Medical Expense: This will cover medical expenses if someone is injured on your property.

As you can see, home insurance covers a lot more than just damage to your home.

You will also want to know the type of insurance coverage you have:

• Actual cash value replaces things based on their current market value, which includes depreciation.
• Replacement cost coverage does not include depreciation, so it will replace items based on the cost of buying them new.
• Guaranteed replacement cost will pay whatever it costs to rebuild your home, even if it’s more than your policy limit. This wording is the most comprehensive (and costly) coverage but can be worth it if you need to use it.

4. Auto Insurance

Auto insurance generally includes the following major components:

• Liability: This includes bodily injury if you hurt a person, property damage if you cause damage to the other car and uninsured or underinsured coverage if you get in an accident with someone who doesn’t have enough coverage.
• Collision: This covers damage to your car. This may be required if you have a loan on the car.
• Comprehensive: This covers damage to your car outside of an accident (hail, theft, fire).
• Medical payments: This covers medical expenses for you and your passengers (usually optional).

For liability coverage, it’s not always the best idea to opt for the state minimum requirement — if you're a high earner or have a large net worth, you want higher coverage here. But collision and comprehensive coverage protect your car. So, if your car is paid off and inexpensive, you may choose to forgo covering your own car and self-insure instead.

5. Umbrella Insurance

This insurance provides an extra layer of protection by sitting on top of your existing car and home insurance policies. Umbrella insurance can cover both you and your family in a number of scenarios, including the following:

• If your child gets sued
• If your dog attacks your neighbor
• If you're in a huge car accident and your auto insurance doesn't provide enough coverage

Umbrella insurance is something important to consider as your income and net worth grow. It's usually unnecessary when you are first starting out and your net worth is low.

It's important to make sure insurance coverage is customized to you and your individual needs. A CERTIFIED FINANCIAL PLANNER™ professional will be able to help you understand if you have any gaps in coverage and can identify insurance options that meet your specific needs needs, whether you are starting out or near retirement. Find your CFP® professional today.