November 1, 2008

Part 8: Protecting Your Financial Assets

[Part 8 of 12 in a series on How to Turn Your Financial Goals into Reality.]

Purchasing an insurance policy is rarely an exciting event. In fact many people avoid doing so, which often places them at considerable financial risk. It is very important to know which insurance policies we really need for each period of time in life and not be burdened with the unnecessary costs of other policies we’re often cajoled to buy.

Life Insurance

For married couples and especially those raising a family, having the proper amount of life insurance could possibly be the most important and affordable method of protecting your assets. In this case, the valuable asset you want to protect is your future income.

“Level term” life insurance is the most inexpensive product available to assure that your family will have the financial resources to provide for vital needs should a wage earner die prematurely. The most common reasons for owning life insurance include providing continued income for a family, college tuition for children, or protecting a self-owned business.

Because term policies do not build any cash value over time, they are not intended to be investment products. However, due to their flexibility and low cost, they can provide much higher coverage amounts than cash value policies with similar premiums.

The most popular terms for this type of life insurance are 10, 15 and 20 years. The owner pays a premium based on the amount of insurance needed, the length of time it will be in force, and the health of the buyer. Once the policy is in effect, the premium will not increase, even if the medical condition of the insured worsens.

Health Insurance

Traditionally, health insurance is offered through employers, often at a reduced cost. For those that do not have employer-sponsored insurance, having a private health policy could be extremely important in protecting your assets.

Most personal bankruptcies stem from overwhelming medical costs, causing families to lose their homes and their life savings. Others accrue massive health-related debts that could take many years to pay off. At the very least, I encourage everyone to have a high deductable health policy. Yes, you will pay out-of-pocket for most health expenditures, but you are protected against the devastating cost of a major medical event.

Add disability insurance to the mix if you are self-employed and can afford the rather high premiums. Experienced insurance experts often say that there is more financial risk from the primary wage earner suffering a debilitating injury or disease than from death.

Protecting Your Home and Property

If you have a mortgage, you are required to have insurance on your home, but once the home is paid off, some people drop this coverage in order to cut costs. They often reason that they’ve never filed a claim, so why pay for insurance that is never needed?

Failing to properly insure your home against potential loss places your family at a huge financial risk. Without insurance, the cost of replacing all or a significant part of your home and its contents can be unbelievably expensive.

Be sure to know whether your policy covers “replacement cost” of the home, as well as of personal property, or if it is just depreciated costs (“actual cash value”, or ACV). If it’s the latter, the insurance company has agreed to pay less than what the replacement of those items will actually cost. Replacement policies are much more expensive, but be aware of which type of policy you own and what your potential liability may be. In either case, you will be responsible to prove what you owned if a loss occurs, so keep receipts or video tapes of the home’s contents in a safe place.

Renters should consider owning relatively inexpensive renters insurance if they have a significant amount of furnishings or valuable items that they could not replace out of pocket.

In Summary

Believe for the best and plan for the worst. That is the best approach in protecting your financial assets. No one enjoys thinking about the negative circumstances for which insurance is necessary. However, having policies that protect our lifestyle and financial assets does provide an element of security and feeling of peace, even if a claim is never filed.

Should you have questions on any of these or other types of insurance, please consult a reliable and properly experienced insurance agent.

Dale A. True, Registered Investment Adviser
True Financial Strategies, LLC
November 2008

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