What would happen if you were at-fault in an auto accident, or if someone was severely injured on your property? These worst-case scenarios can ruin a family’s financial plan in an instant.
Luckily, insurance can help protect families from these scenarios by covering some, or all, of the costs resulting from an adverse financial event. By having sufficient coverage, you will be able to avoid footing the bill of any unexpected, volatile expenses.
With National Insurance Awareness Day taking place on June 28th, there’s no better time than now to go over the various types of insurance you should have and how much coverage you need to avoid financial devastation in the event of unforeseen circumstances.
When it comes to auto insurance, having high liability limits is most important. In the event you’re involved in an at-fault auto accident and injure someone, you could be sued for medical expenses and lost wages. It is recommended that people have auto liability limits of at least $300,000 per person, $300,000 per accident and $100,000 for property damage. This is far above what is mandated by states – but better safe than sorry!
Homeowners should insure the full value to rebuild their home, which is different from the fair market value, with an open perils policy. Under an open perils policy, also referred to as a HO-5, all losses are covered after the deductible is paid unless a loss is specifically excluded from the policy, such as floods.
In order to be protected against floods, a flood insurance policy must be purchased separately through the National Flood Insurance Program. Even if you do not live in a flood plain, you may still need a flood policy – over 20% of flood claims occur outside a designated flood area.
Another type of insurance that is an add-on to a homeowners’ policy is homeowners’ liability insurance. All homeowners should have liability insurance in the event someone is injured on their property and decides to sue. It is recommended that the homeowners’ liability limit matches the auto liability limit of $300,000.
In order to lower the premiums for auto or homeowner’s insurance, you can raise your deductible, which is the amount you pay before the insurance company issues payment for a claim. People who have higher deductibles end up paying less out to insurance companies because the premiums they pay overtime are lower. However, it is important that a rainy-day fund is in place so that you can cover your deductible.
Umbrella Liability Insurance
One of the most overlooked insurance products is umbrella liability insurance. As the name suggests, umbrella liability insurance is coverage that extends beyond your auto and homeowners’ liability policies.
For example, say you have a teen driver who gets in an at-fault accident and the other party suffers a severe injury. In this case, the parents of the teen would likely be sued, and the lawsuit would exceed the auto coverage of $300,000. But, if the family has umbrella liability coverage, that policy would kick in and cover the remaining claim amount. A household should have an umbrella liability policy that covers the greater of their net worth (assets minus liabilities) or future earnings.
Long-Term Disability Insurance
Since income can be lost because of a disability or death, a long-term disability policy is recommended and can often be obtained through your company’s employee benefits. Typically, people can forgo purchasing a short-term disability policy if they have a rainy-day fund to cover household expenses for a few months. However, a long-term disability can be much more severe financially and individuals should be prepared and insured for a worst-case scenario.
Finally, if a spouse or partner depends on your income, a life insurance policy should be purchased. The type of policy (term or whole life) that is best for you depends on the end goal. A term policy provides coverage for a specific length of time - typically between 10 and 30 years. This should be purchased if the goal is to get to retirement (with adequate savings in place). A whole life policy provides coverage as long as the premium is paid. This type of policy should be purchased if the life insurance needs to last your whole life, such as for a bequest.
It is imperative for people to understand their insurance needs and protect themselves against catastrophic losses to prevent financial ruin. To discuss which policies are best for you and your family, consult a fiduciary, such as a CFP® professional, who can provide guidance on the amount of coverage necessary to adequately account for all of your existing assets.