Overlooked Insurance Needs

Most everyone one knows they should have health insurance and car insurance. However, many people overlook some important insurance products that could stave off disaster.  Here are a few insurance products that most people should consider if they don’t already have them.

Term Life Insurance

Term life insurance is life insurance that exists for specified number of years.  If you die during the specified period, your beneficiary will be paid the policy amount.  Once the term ends, then the policy is void. 

For example, say you bought a 20-year $1 million policy 8 years ago.  That would cost about $45/month. If you continue to pay the premium and you die in the next 12 years, the policy will pay your beneficiary (whomever you designate) $1 million.   After 12 years go by the policy will be void. Most advisers recommend buying a policy that equals 10 x your annual salary. You should choose a term that doesn’t expire until some of your major life expenses will have come and gone, such as college for example.

Don’t confuse term life insurance with whole life insurance or universal life insurance.  Whole life and universal life are financial products that combine a death benefit with an investment portfolio.  Basically, part of the premium goes toward paying the death benefit and part of the premium gets invested. So unlike term life, the policy has a cash value.

This sounds pretty good at first blush.  However, whole life premiums are higher than term life. And a lot of the premium goes toward paying fees – especially at the beginning of the policy. Most people would be better off buying a term policy and investing any additional $$ in mutual funds.

Check out these two websites that discuss the differences between to the two policies: Dave Ramsey and Investopedia

Umbrella Insurance

We wrote about using umbrella insurance as an alternative to buying investment real estate in an LLC.  An umbrella insurance policy kicks in if/when you exceed the policy limits of your underlying insurance. For example, say you have a car insurance policy with a liability limit of $300K.  You run a red light and hit another car.  Your negligence injures the other driver and he/she sues you successfully for $1 million.  If you have a $2 million umbrella policy, that umbrella policy will kick in to cover your liability over $300K.  Without the umbrella you could be on the hook for the amount that exceeds your policy limits.

Some insurance companies, like USAA, allow their umbrella policies to cover liabilities not insured USAA. For example, USAA’s umbrella policy will cover rental properties who have home owner’s insurance through another carrier. 

Long Term Disability Insurance

Do you know what you will do it you get ill or injured and can no longer work?   A friend of mine in the insurance business told me workers have a 1 in 3 chance of suffering a disability that prevents them from working.

If that happens to you, hopefully, you have long term disability (LTD) insurance. If not, you’ll have to rely on savings and/or social security disability (SSDI) benefits. SSDI is designed to meet basic needs not to replace your lost income.  The average SSDI benefit is around $1K/month.  LTD, on the other hand, is designed to replace most of your lost income.  Furthermore, qualifying for SSDI can be more difficult that LTD.  What about workers compensation?  Workers comp only covers on-the-job injuries. 

Fortunately, many employers offer LTD.  If you’re not sure whether you have LTD, you should definitely check to see if you employer offers it.  If not, many private insurers offer policies that you can purchase on your own.  The premiums aren’t cheap and range from 1-3% of your income.  But that’s nearly as an expensive as not having it and needing it.

Flood/Earthquake Insurance

Standard homeowner’s insurance policies do not cover damage caused by floods and earthquakes.   So, if you live in an area prone to earthquakes or flooding, you should really consider purchasing this additional coverage.

Flood polices are offered by FEMA’s National Flood Insurance Program (NFIP) and purchased through private insurance companies.  Homeowners in designated flood plains are required to have the insurance if they have a federally backed mortgage.  But homes not located in flood plains can flood too.

In California, the California Earthquake Authority (CEA) offers earthquake policies through designated insurance companies.  Private companies offer policies in other states.  As one might imagine, the closer you live to an active fault the higher your premium.  Deductibles for earthquake insurance are high.  CEA offers deductibles of CEA offers deductibles of 5%, 10%, 15%, 20%, and 25% of the coverage amount.  Of course, if you don’t have earthquake insurance your deductible is 100%.

Conclusion

Insurance is one of those things you hope you never have to use. Some people are willing to take the risk of not having it. But not having adequate insurance can be financially devastating. 

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