Most people recognize the need for homeowners and automobile insurance , even if they don’t appreciate how much property and casualty coverage they should have.
A mortgage lender will typically require insurance on the mortgaged property, but in any case it would be foolish not to have it. The loss of a home could be financially devastating, and even partial losses can put a significant dent in a family’s financial security. It is important to have sufficient coverage to replace the dwelling, and although contents are generally included, special endorsements may be necessary to cover certain valuables such as jewelry, art or furs. In some areas it is important to procure specific coverage for perils generally excluded, for instance earth movement or floods. Another significant piece of the HO policy is liability coverage, in case the homeowner is found responsible for injury or damage to other persons or property.
People who rent their home might overlook the necessity for insurance, but it’s just as important for them to obtain coverage for their personal property, as well as liability protection. The landlord’s policy does not cover the tenants. Renters insurance is similar to homeowners except that the dwelling itself and related structures are not included. However, any improvements added by the tenant can be covered by an endorsement. There is also a special policy type for condominium owners. A good way to be prepared in case there is a need to file a claim is to go through the house and videotape the contents of each room, storing the video at some secure offsite location, or perhaps online.
Auto liability insurance is another critical item, and most states require at least a minimum amount of coverage on registered vehicles. (Some states may allow proof of financial responsibility as an alternative to insurance.)The required minimum is usually inadequate in the case of any major mishap so if the client has significant assets to protect, this should be considered in choosing the amount of coverage. Auto liability coverage can be a split limit or single limit. With a split limit, e.g. $100,000/$300,000/$50,000, the first number is the maximum amount that will be paid for bodily injury to any one person, and the second is the maximum for bodily injury per accident, and the third number is the maximum that will be paid for property damage. A single limit will pay the stated amount per accident, without any restriction on how much goes to one person. The limit of liability for property damage is a separate amount.
Further protection can be obtained to cover theft or damage to the insured vehicle. It comes in two parts, collision and ‘other-than-collision,’ formerly known as comprehensive. There is usually a deductible amount for claims under these coverages, and the insured should consider how much he or she is able to pay out of pocket when choosing the deductible. A higher deductible may be worth the premium savings. For some older vehicles this damage protection may not be worth buying, depending on a number of factors, including the cost of coverage and the amount the insurer will pay vs. the value of the vehicle.
In analyzing a client’s insurance coverage, keep in mind the aim of protecting assets. Often a person of higher net worth will need additional liability coverage in the form of an umbrella policy, which protects above the limit of the HO and auto policies. One rule of thumb is to have coverage equal to the client’s net worth.
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People have many reasons for not being involved with a financial planner. Some are deterred because they consider financial planners to be merely glorified insurance sales people. While this is clearly a misconception, one aspect of thorough financial planning is to make sure a client’s assets are protected, and insurance is a valuable tool for this purpose. The planner would be remiss if he or she did not discuss it with clients when appropriate.
One type of insurance that might immediately come to mind is life insurance. Not everyone needs life insurance, but anyone who has a family to support or other people depending on his or her income should have this coverage. It can also be useful to provide a bequest for heirs or leave a gift to charity. Perhaps there is a large mortgage on the home or a vacation property, and the client wants to ensure that it gets paid off so heirs will not be forced to sell if they don’t want to.
Life insurance is a complex subject; there are many different options, and always new twists being introduced. A planner can help clients to figure out whether they need life insurance, as well as how much and what type would be most appropriate.
Another insurance consideration that’s often overlooked is disability income insurance. People will obtain insurance coverage for their property and possessions, but overlook the value of their ‘human capital,’ the ability to go to work and earn a living. For those in the early stages of their career, human capital may be their most valuable asset. Most people take the ability to work for granted, and don’t give much thought to the possibility of accident or illness depriving them of this capacity. But how would they pay their mortgage or put food on the table if they were unable to work?
Those in good health and practicing healthy habits might think a disability won’t happen to them, but catastrophe can strike anyone. It might surprise some people to learn that they are much more likely to need disability insurance than life insurance during their working years.
According to recent statistics, about 25% of those just entering the workforce will have a disability lasting 90 days or more sometime during their career. Social Security might help somewhat, but there is a 5 month period before a person is eligible, and the rules to qualify are very strict, so it shouldn’t be too heavily relied on. But disability income insurance can save the day. Some people have coverage through their employer, but it may not be sufficient, for instance if a large part of compensation is via bonus rather than base salary. In such cases a separate individual policy might be advisable.
Some things to consider when choosing a disability policy are the elimination period (length of time of disability until the benefits begin), the percentage of income it will replace, and the definition of disability. Social Security will pay only if you are unable to perform any job, while most private policies are less restrictive, based on inability to perform your own occupation or possibly a related one. There are other variables and complexities as well, and like life insurance, this is where a savvy financial planner can put a client on the right track!
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A relative newcomer to the health insurance field, the High Deductible Health Plan (HDHP) first came on the scene in the early 2000s. Sometimes referred to as a Consumer Driven Health Plan (CDHP), this option was meant to make consumers more cost-conscious and careful about their health care choices. For instance, perhaps it would encourage people to use the Emergency Room only for true emergencies and seek less costly care for routine matters such as the flu or a sore throat. Because consumers are obliged to bear more of the financial burden, these plans have lower premiums and have steadily gained popularity with employers who offer health care coverage.
Fortunately, another piece of the puzzle is the Health Savings Account (HSA), a tax-advantaged vehicle for accumulating funds to cover these increased healthcare expenses. A person who is covered only by an HDHP meeting certain criteria is eligible to open an HSA. For 2016, the HDHP has to have at least a $1,300 deductible for individual coverage or $2,600 for a family, and an out-of-pocket limit of no more than $6,550 for one person or $13,000 per family.
Contributions to the HSA are tax-deductible (above the line) and withdrawals are income tax free if used for qualified medical expenses. If the money is taken out for any other purpose a 20% penalty applies, along with income tax. For an individual 65 or older there is no penalty, but taxes must be paid if funds are used for non-qualified spending.
Unlike other medical savings accounts, such as a Flexible Spending Account, the money in the HSA does not have to be spent by the end of the year; it can be left to accumulate until it is needed. Also, although many HSAs are sponsored by employers, and the employer might make a contribution each year, the account belongs to the employee and goes with the person if he or she changes jobs.
Given this favorable treatment, an HSA can be an excellent way to save for retirement, similar to an IRA. The maximum annual contribution for an individual is less than for an IRA, $3,350 in 2016, including employer contributions, but is increased by $1000 for those 55 and over. If the HDHP covers a family, the 2016 contribution limit is $6,750, also with the $1,000 catch-up provision for age 55 and above.
The money in the HSA can be invested in money market, stocks, bonds or other such products. If the funds are then used for eligible medical expenses, the HSA is better than a Roth IRA, having deductible contributions but no tax on withdrawals. Once a participant reaches age 65, the account functions like an IRA for non-medical expenses, with income tax due on withdrawals but there is no penalty. The other side of the coin is that persons who are age 65 and older (enrolled in Medicare) are no longer eligible to make contributions to the HSA, although existing balances within the account can be maintained.
With health care expenses expected to be a much greater burden for retirees, a wise strategy in your younger years is to pay as much of your medical expense as possible from funds outside your HSA and try to build up the account as a cushion for the future.