Thursday, November 09, 2006

Protecting Your Wealth – Insure Against the Risk of Financial Disaster

The greatest wealth destroyers are extended major negative events in health, inability to work, property loss, and death. Insurance is an excellent way to protect against these major negative events and the potential resulting financial disaster. (Another wealth destroyer is loss of job or pay cut which I will discuss in a later post.)

Here are the insurances I carry at a cost of 3.4% of before tax income to protect my wealth.

Health – The minimum coverage one should have is major medical (i.e. cover hospitalization and treatments.) If you can afford well care, it is coverage worth purchasing, especially if you have children. For reference, high medical expenses are the leading cause of bankruptcy.

I have a network plan through my company that has a co-pay for well care and major medical. It also allows for out of network visits.

My yearly cost – 0.8% of before tax income

Disability – Protects against salary loss if you cannot work for medical reasons. Statistically, one is more likely to need disability than life insurance during one's working years. Disability pays you a portion your income should you be medically unable to work.

My company’s disability plan starts after 7 days and covers up to 100% of after tax income. Remember, Social Security will also provide some coverage for disability. For reference, my company’s plan covers the difference that is not covered by other plans such as Social Security with starts after 90 days of disability.

My yearly cost - 0.4% of before tax income.

Liability – Protects your assets should you ever be sued. Usually renter’s or homeowner’s insurance will provide basic liability coverage. Auto insurance covers automobile related liability. If you have a net worth greater than these coverages (usually $250,000), consider getting an umbrella policy for $1 million.

I carry the maximum homeowner’s and auto liability and a $1 million liability umbrella policy.

My yearly cost for 2 cars – 0.6% of before tax income; Umbrella – 0.1%.

Property
– Protects against loss of material assets. Homeowner’s or renter’s insurance protects against fire, theft or other loss. Auto insurance protects against loss or damage to an automobile. By the way, these insurances also provide some liability coverage.

I choose not to insure individual items such as jewelry, art or antiques.

My homeowner's yearly cost – 0.6% of before tax income.

Life – Provides payment on the death of an individual. The wage earner or earners should all be insured. The amount should be equal to the “financial disaster” against which you are insuring. For example, if the death of a wage earner will cause the family to miss mortgage payments, insure for the cost of the mortgage or to create a payments that replace part of the salary. Other’s have recommended insuring for the difference between one’s net worth goal at retirement and one’s current net worth, especially if you have small children.

I have life insurance for 2 times my salary (4 times if accidental death). This amount will pay off our mortgage. In addition, I have a survivor income policy that pays about 30% of my after tax income. This will supplement survivor income of $3180 per month provided by Social Security for a spouse and child.

Since my spouse is not working, we only have only a $10,000 life insurance policy for her. In addition, Social Security will provide survivor income of $1870 per month for the surviving spouse (me) and child.

Net, death of one spouse will little financial impact on our family due to our insurance structure.

My costs for life and survivor income insurance is about 0.3% of yearly before tax income. (My company covers life insurance for 1 times my salary).

Long Term - This insurance covers stays in nursing homes after a 90 day wait period. Typically, it provides about a level of daily benefit ($100 to $250) for about 5 years. Most financial advisors recommend getting this insurance after one is 50.

While I am usually not one to purchase unnecessary insurance, I bought this when I was 24 because the yearly premium was about $25 per year (for $100/day coverage) and was returned to the estate upon death if the insurance is never used. When we applied for coverage for my mother, the cost was about $700 per month. Of course, the reason for cost difference is that the probability of using a nursing home at 24 is very low.

My yearly cost for 2 of us – 0.6% of before tax income.

Total insurance cost – about 3.4% of income. Some may wonder why I pay so much for insurance each year. Wouldn’t it be better to save the money? My point of view is insurance is protection I hope I never need. If I don’t use it, great. However, if I should need it, the insurance will minimize the financial (but not emotional) impact of any negative event. Basically, I am paying for “peace of mind” which is worth it to me.

This is not financial or insurance advice. Please consult a professional advisor.

Copyright © 2006 Achievement Catalyst, LLC

6 comments:

Dimes said...

:-) You must be making more money than we do. I think our insurance expenses are about 5% of income.
With insurance so cheap, I'm amazed people don't have more of it, ESPECIALLY renter's insurance.

Super Saver said...

:-)

Agree with you on renter’s insurance. I was a member of an organization which was sued when a guest fell off our St. Patrick’s Day float and broke his arm. Fortunately, the liability portion of my renter’s insurance covered all my legal fees and my part of the damage settlement. As I wrote in my post, having peace of mind was well worth the cost of insurance.

GolbGuru said...

Nice article, I am mentioning it in the "Interesting article of the week" post...I am writing it just now so look out for it.

Super Saver said...

GoldGuru,

Thanks for choosing this post for your Interesting Articles of the Week.

nolandda said...

"Statistically, one is more likely to need disability than life insurance."

You might want to clarify this one. I understand your point, but statisticaly speaking on a long enough timeline the probability of using life insurance is one. Whereas if you die suddenly you may never use disability.

Super Saver said...

Nolandda,

Thanks for your comment and request for clarification.

There are two assumptions in this statement. The first is that the probability is for a specific age during one's working years. For example, at 42, one is three times more likely to be disabled than die. (Reference: FreeAdvice.com) The second is that one only needs disability insurance during one's working years. One third of all Americans between 35 and 65 will become disabled for more than 90 days. (Reference: SmartMoney.com)

Based on your comment, I have revised the statement by adding "during one's working years."