How to Lower Risk
Risk is inherent in everything you do, and finances are no different. The most financially stable of us have policies in place to minimize that risk, however sometimes those policies get pushed to the background when life gets busy or major changes happen (buying a home, getting married, etc.). To get back on track, sometimes you have to go through your entire plan. The following list is here to guide you.
Car- It’s imperative that you keep sufficient coverage on all of your vehicles. You should review your policy every time you renew to make sure that the limits are adequate to meet your needs. Normal liability insurance limits of $250,000 are usually sufficient, but the higher, the better. As far as comprehensive and collision insurance, it may be smart to weigh the pros and cons of having this kind at all. Typically, the older your car is, the less necessary it is, as the insurance company never pays as much as the car would have been worth un-damaged. An alternative is to take the money you would have paid in premiums and put it in a savings account. If you never have an accident, you can use that money as a down payment on your next vehicle. Owe more on your car than it’s worth? Gap insurance is a must. This will cover the difference between the amount you owe and the amount paid by your comprehensive and collision plan (i.e. the “gap”). Though, it’s always better to not have an auto loan at all.
Home – If your home experiences a fire or a natural disaster, home owner’s insurance can be the difference between rebuilding and being homeless. It’s important that your insurance limits are high enough to cover the entire cost of re-constructing the home. That is, the costs associated with labor and materials in the current market, not the price that you paid for the house. Depending on your home, your insurance limits should always be $250,000 or more, and just like with car insurance, the higher, the better. If you have certain valuables in your home, such as jewelry, collections, etc., it might be prudent to purchase a second insurance policy just for these items, or purchase a home owner’s policy that will allow you to specifically cover these items in addition to your home. There are also certain features of a home that can make your insurance premium rise or may not be covered in an emergency, such as swimming pools, certain dog breeds, and trampolines.
Life- Do you know who is listed as your beneficiary? You may have had kids or gotten married since the last time you looked at your policy, so you need to review it to ensure that everything is accurate. It’s also smart to shop around and get new quotes to make sure you’re not paying too much.
How is your coverage? You might have too little, which would create a hardship on your loved ones in the case that you pass away. Or, on the flip side, you might have too much, which means that you’re paying more than you should. If your employer provides coverage, is the coverage enough? If you are not sure how much is “enough” or “too much,” it might be a good idea to speak with a financial counselor. Most banks offer their services for free to members.
Disability – What would you do to support yourself and your family if you were to become permanently disabled? Disability insurance can provide a valuable safety net to protect you in the unfortunate event that you are no longer able to work. You can often get group disability through your job, which is an excellent perk. People whose jobs do not provide this insurance should look into the option of buying a policy themselves. It’s important to review the policy’s description of what disabilities it covers, as well as the different levels of coverages. Normally, lower premiums provide fewer options, and more difficulty when trying to file a claim, due to strict definitions. The elimination period is a large factor that should be carefully reviewed as well. This is the length of time that you have to wait between filing a claim and receiving benefits, in the case of disability.
Health– It is important to go over your policy to make sure that the options you’ve chosen still fit your lifestyle. For instance, is your provider in network? Do you take any medications? Do you go to the doctor often? You may be able to save money by switching to a less expensive plan, or to a plan that fits your lifestyle better. Additionally, a Health Savings Account (HAS) is an excellent tool to help you offset the costs of high deductibles.
Emergencies – An emergency fund isn’t insurance in the strictest definition, but it does ensure that you’ll have money to cover your monthly costs if you lose your job or cannot work. It’s a good idea to set aside 3-6 months’ worth of living costs and never touch it, except in a true emergency. Also, if you have your emergency fund in good shape, you can raise deductibles on your insurance plans and pay lower premiums, because if something were to happen, you would have the money to pay the deductible outright.
Many people don’t know what umbrella coverage is, and therefore don’t invest in this important insurance. Umbrella insurance is for when the limits are exceeded in a claim on another plan. For instance, if you were to get into a car accident, and the damage was more costly than your insurance allowed, then the umbrella coverage would kick in. Since umbrella coverage is rarely used, it’s often very inexpensive.
Risk management is imperative to smart financial planning. Never wait until you need to use your insurance benefits to find out what your insurance actually covers. You should always have the choice to create the insurance profile that meets your situation best, and not have your employer pick the coverage without your review. Insurance is there to help you in the worst of times, all while hoping that you stay in the best of times and never need to use it. But if you ever do have to use it, having these plans in place will make sure that your entire financial life isn’t ruined.