Establishing Financial Security: Obtaining the Right Insurance

Often, people who have had problems with debt make the argument, “My budget is tight as it is. Isn’t insurance a luxury?”

Quite the opposite. Unlike the very wealthy, who may have sufficient assets put aside in savings to guard against crises, obtaining appropriate insurance may be most important for people with average incomes and people struggling with debt. If your budget is tight under your current circumstances, how would you or your family be able to manage financially should you suffer a loss of income in your household due to illness, disability, or death? Insurance provides you with the necessary security to enable you and your family to stay afloat in spite of severe circumstances. Insurance is not a luxury but, just like when you make any significant purchase, you need to be a “smart-shopper” so you remain in control and wind up with the insurance that you need and not more than you bargained for.

What types of insurance policies should I be considering?

Very simply, health, disability, and life insurance. And, if you are over 55, you may want to consider long-term careinsurance.

Why health insurance? I’m young, fit, and have never been sick a day in my life.

First, let’s find some wood to knock on. Unfortunately, your health status can change without warning. Everyone needs to have health/medical insurance. Without it, a serious accident or debilitating illness can wipe you our financially.

Besides the premiums, are there differences in health insurance plans?

Sure. Here is an explanation of just a few of the different type of health insurance plans you might obtain on your own or through your employer.

Fee-for-Service—These plans are the most traditional and allow for visits to virtually any doctor your choose. You’ll get the most choices under this type of policy and, therefore, it is likely to be the most expensive for you to maintain with fees paid through relatively high annual premiums, co-payments, and deductibles.

Managed Care—The less expensive alternative to a traditional fee-for service plan restricts your choice of doctors. Under these types of plans, you may opt to belong to a strict Health Maintenance Organization (HMO) or a somewhat less restrictive Preferred Provider Organization (PPO). In an HMO, only visits to in-network doctors are typically allowed. In contrast, PPO’s allow you to see doctors who are outside the network but, the reimbursement rate or fee paid to the doctor by the insurance company is much lower leaving you with a typically high co-payment and /or deductible.

Is life insurance a necessity for everyone?

As a single person, you probably don’t need life insurance.

However, if you have dependents (spouse, children) who rely upon your regular income and if the total financial assets you already possess are not sufficient to provide for their ongoing needs should you die, then life insurance is a necessity for you. In fact, the purchase of life insurance is one of the most important and responsible steps you can take to secure your family’s financial future and well being. As a provider, you work hard every day to make sure the needs of your family are met in terms of food, housing, clothing, medical care, and education. Maintaining life insurance allows you to have peace of mind that your family’s needs will continue to be met should you pass away.

And, keep in mind, that if you and your spouse both earn income, you will need a life insurance policy that provides coverage for each of you in the event of death.

How much life insurance should I obtain?

Enough to sustain your family’s present standard of living in the event you are no longer around. For your spouse, you will want this support to continue indefinitely. For your children, you will want this support to continue until they are old enough to leave home and take care of themselves. Remember, in determining the total death benefit coverage you will need, you should consider your family member’s future needs as well, such as college education costs.

An often quoted estimate of the amount of life insurance coverage to obtain is 5-7 times the amount of your annual gross income. Therefore, if your income is $25, 000 per year, you should obtain a life insurance policy that pays a total benefit of $125,000 to $175,000. Your surviving family members will also need to wisely invest the greater part of the benefit they receive in order to effectively get the most out of the protection you have provided for them.

What is the right type of life insurance to obtain?

While there are an ever-increasing variety of life insurance choices to consider—as well, as to become utterly confused by—there are really two basic types of life insurance to focus upon.

The first of these basic types is Term Insurance, which is insurance, pure and simple. Term insurance provides a benefit (a payout) in the event of your death, only. It is the least expensive type of insurance you can obtain and stays in force as long as you pay the monthly premium. In most cases, for just a little extra cost, you can lock in the rate of your term insurance premiums for periods as long as 15, 20 or 30 years.

The second, and much more complex type of life insurance is Cash Value or Whole Life Insurance. This type of plan is actually a combination life insurance and savings plan.

With this type of insurance plan, a portion of your premium each month is put aside for you in savings by your insurance company or else invested for you. At the end of the policy period, or when you reach a specific age (usually, 65), youcan “cash-out” your policy and receive the funds that have accumulated in your account.

Note, that cash value insurance is much more expensive than term insurance, with significantly higher premiums and fees to pay. In addition, you may have few choices over how your money is invested by your insurance company over the many years you might hold this type of policy.

For these, and a variety of other reasons, term insurance is likely to be the best choice for most individuals and, particularly, for anyone for whom cash flow is a concern.

Term insurance will provide you with adequate financial security in the form of a simple, death benefit you will hope you never need. While cash value insurance is tempting because of its provision of “forced savings”, you will be far better off strengthening your own resolve to save regularly and maintaining personal control over your own savings plan.

Why do I need disability insurance? It’s not like I drive a race car for a living.

Hopefully, your job is a pretty safe one. But, even if you sit behind a desk, a rather frightening reality of life is that an individual is actually 3 times more likely to become disabled during their working years than to die. Not all disabilities occur as a result of performing dangerous duties. Periods of recuperation following surgery, household accidents and illness, and even severe emotional stress can result in the inability to work for an extended period of time. A disability policy is the surest way to insure your greatest asset—your earning power—in the event that you become permanently or temporarily unable to work.

Be grateful, however. If you do work behind a desk, you’ll pay less in premiums for your disability policy than someone with a “racier” job. In addition, if you obtain your disability policy at a young age, you may be able to lock in a relatively low premium rate and avoid the more expensive disability premiums typically charged to older individuals.

How much disability insurance should I carry? And,what is an “Elimination Period”?

During the period of time in which you are not working due to illness or injury, your disability policy should provide enough benefit to cover 60% of your gross income—that’s before taxes and other deductions. Nearly all disability policies, however, provide a period of time between the onset of your disability and the time when the policy “kicks in” and begins to pay benefits to you. This period of time is called the “elimination period” and should be no more than 90 days for the policy you obtain.

What is long-term care insurance?

Long-term care insurance is a relatively new form of insurance that has been gaining in popularity and acceptance due to the dual realities of rising health care costs and lengthening adult life spans. Long-term care insurance is insurance you purchase today to cover the costs of prolonged health care should there come a time when, due to specific illness or aging, you enter a supervised medical, nursing, or assisted living facility for an extended period of time. Because longterm care insurance is expensive in terms of monthly premiums, it is most often recommended for individuals age 55 and older. While this type of insurance makes sense and obtaining it at some point should be considered an important aspect of your financial responsibility you owe to yourself and your dependents, you should be aware of important limitations in this type of coverage. For one thing, even most long-term care insurance policies provide coverage for a specific length of time, only. In other words, long-term does not mean indefinite. Furthermore, most long-term care policies carry a provision that the policy may be enacted one time only, that is, you cannot initiate benefits and then, due toimprovement in your health condition, suspend benefits until a later time when your need becomes great again.

What Should I do Next?

While nearly everyone desires financial security for their future, sadly many people expect that obtaining that security is outside their reach. They may expect to be working all their life or assume true financial security is only for those with large bank accounts. In fact, maintaining savings is just one form of establishing financial security for yourself and for your family. The truth is, most people cannot and should not expect to “save” enough to cover all their future financial needs. That’s why maintaining appropriate insurance coverages should not be considered an option to be exercised at various times when your paycheck allows it, but rather a necessity for establishing and maintaining financial security that will allow you peace of mind and more restful sleep at night.

Consider your own insurance needs carefully, according to the information described in this report. Take an inventory of the insurance coverage you presently have on your own or through your employee benefits plan. Check the policy information carefully and if you have any questions about the extent of coverage you maintain, talk it over with your employer’s human resources representative or with the agent who sold you your policy.

After you have reviewed the type of insurance needs you have and taken an inventory of the types of insurance you are currently paying for, speak with your FreshStart coach. Your coach will not attempt to sell you insurance. That’s not what we are here for. But, we can help clarify your understanding on these matters and guide you in formulating a comprehensive plan that will help you achieve personal financial security!