How Much Insurance Do I Need?

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Brian and Bo discuss insurance necessities as well as the appropriate level of insurance to carry across varying career and life stages. The guys also discuss emergency reserves and disability insurance. If you are in the market for insurance this is the show for you!

First, everyone agrees that you should have 3-6 months of emergency reserves on hand, but which end of the spectrum do you fall into? If you work in a highly marketable industry where jobs are plentiful, 3 months is probably the best way to go. However, if you have children or you’re married and only one spouse is working or some variation of the two, it makes sense to carry a higher level of cash reserves. Say, 6 to 9 months of total expenses.

Second, statistics show that 50% of foreclosures are the product of a disability. Also, the likelihood of becoming disabled is much greater than dying prematurely. So, how much and what kind of disability insurance makes sense for you? We prefer the disability rider or contract known as “own-occ,” which basically means that coverage will be afforded to you in the event that you are unable to perform your occupation. The reason for this is that in the event that you can no longer perform the tasks of your job, but you are possibly able to perform another job then you could still receive coverage under your policy.

Next up – Life Insurance: The standard coverage amount is 10-times your income. There are obviously some variables that come into play when calculating the amount of insurance needed. If there are mortgages or educational needs, it may make sense to add on those expected cost to your coverage. This way if something were to happen, the insurance payout would be great enough to pay off the house or put the kids through school. Also, in the case of a single income family additional insurance makes sense as well as adding insurance for future children.

What type of policy makes the most sense for your situation? We typically prefer term, but there are cases that permanent insurance makes sense. With term you can set the duration of your coverage, which may be until the kids get out of the house, or when you actually get the house paid off. If there are estate liquidity needs, especially for high net worth individuals or those who have a high level of very illiquid assets, permanent insurance may be a good option to look into. But wait, there’s more (insert infomercial voice-over)! Coverage for nonworking spouse does make sense, especially if there are children in the household. There is definitely a monetary value of stay-at-home parents that needs to be considered in this situation. The working spouse in most cases will need that cash flow to cover the mourning period as well as child care coverage expenses.

Brian and Bo briefly discuss umbrella coverage. It almost always makes sense to have some sort of coverage. It pays above and beyond the current limits of your other insurance policies. It can help protect your future income streams as well as lawsuits that exceed your regular insurance amounts. It is too easy not to have coverage, as it is normally very affordable, even for a fairly high amount of coverage.

An insurance topic would not be complete without touching on long-term care coverage. Here is what we know: The coverage area for this insurance need is a doughnut hole. If you have assets under $1 million, coverage probably is not appropriate, because the coverage is expensive and Medicare could help in your situation. For those that fall within the $1-3 million range, LTC coverage is probably most appropriate in your case. Medicare may not offer enough coverage and you could quickly deplete your assets trying to cover your expenses. The other side of the doughnut hole is those that have net worth in excess of $3 million. At this level it probably does not make as much sense to carry the coverage due to the high cost, and the availability of resources to provide self–management in this department.

Knowing When to Go Pro

Hiring a professional financial planner could possibly be the key that unlocks the door to your financial success.  At the same time, choosing the right advisor to work with is an important decision that can often seem overwhelming.  In today’s show, we discuss the services that planners will and will not provide as well as key things to look for when hiring a pro.

In the March edition of MoneyAdviser, Consumer Reports outlined what typical fee-only planners will and won’t do for their clients:

What they will do:

  • Help you figure your net worth:  Typically, a planner will have the client gather the necessary data and then create a statement to uncover other planning opportunities, such as insurance analysis or estate planning.  (Do-it-yourself tip:  Collect current statements for all assets and liabilities and use an online net worth calculator, such as Mint or Yodlee, to determine your net worth each year.)
  • Advise you on 401(k) investments:  Your planner should be looking at all the pieces of your financial puzzle, including your 401(k) to ensure that your saving and investing goals line up across the board.  (Do-it-yourself tip:  See if your 401(k) plan sponsor offers access to investment guidance or check out the online retirement-planning program, Financial Engines, for additional support.)
  • Help you invest a lump sum:  A planner should be able to offer tax-efficient investment advice to their clients, as this is a core activity of financial planning.  (Do-it-yourself tip:  Use Morningstar software to research mutual funds and stocks for your portfolio.  Also, check out Bo’s Money-Minute about investing in a lump sum vs. dollar cost averaging.)
  • Determine if you’re properly insured:  Your planner should be able to evaluate your insurance needs, as well as refer you to an agent that can provide the coverage.  (Do-it-yourself tip:  Do as much research as possible and shop around for the best rates.)
  • Assess if you’ve got enough to retire:  A planner can determine whether you are on track for retirement or if you need to explore other options, such as working longer or changing your lifestyle.  (Do-it-yourself tip:  Assess your potential income sources, including Social Security, and use an online tool to calculate where you stand.  Consumer Reports recommends T. Rowe Price’s Retirement Income Calculator and Analyze Now’s Free Retirement Planner.)
  • Coordinate your retirement income:  Planners can determine the best method for drawing funds from your various retirement accounts, while considering tax consequences.  (Do-it-yourself tip:  Consumer Reports advises that unless your retirements consists entirely of Social Security and a pension, you might want to consult a professional on this one.)
  • Help you plan for college funding:  A planner can guide you on the best ways to finance your child’s education.  (Do-it-yourself tip:  Visit www.collegeboard.com, www.savingforcollege.com, and www.finaid.com for additional resources.)

What they won’t do:

  • Help you pay down debt:  As a general rule, fee-only financial planners refer such clients to a debt counselor or a bankruptcy attorney.  (Do-it-yourself tip:  Contact the National Foundation for Credit Counseling if you need help with debt.)

The gray area:

  • Help you control your spending:  While many planners recommend following a budget, it’s not cost effective for you or the planner to spend hours together developing a detailed budget.  Most planners are interested in overall cash flow and will recommend cutting back if needed.  (Do-it-yourself tip:  Create a spreadsheet or utilize budgeting software like Quicken, Yodlee, or Mint.)
  • Create an estate plan for you:  Planners can help you decide the structure and tax efficiency of your estate, but an estate-planning attorney will be needed to draw up wills, trusts, and end-of-life documents.  (Do-it-yourself tip:  Contact an attorney to prepare or review your documents.)

If you decide that hiring a financial planning professional would be beneficial for you, the following credentials should stand out to you:

  • Certified Financial Planner (CFP):  holder has passed a 10-hour exam, has at least three years’ financial planning experience, and has completed an approved course of study.
  • Chartered Financial Consultant (ChFC):  requires eight college-level courses in financial planning and 30 hours of continuing education every two years.
  • Certified Public Accountant/Personal Financial Specialist (CPA/PFS):  CPA with specialized training in personal finance.
  • NAPFA – Registered Advisors:  holder meets strict education and professional requirements for membership in the National Association of Personal Financial Advisors, for fee-only planners.
  • Chartered Financial Analyst (CFA):  holder completes a series of three six hour exams and has four years of qualified work experience.

Hopefully this information will be helpful if you are considering hiring a professional to guide your finances.  Check us out on Facebook, YouTube, and please leave any questions or comments below!

 

Links to other things mentioned in today’s show:

Is This the End of Popping Vitamins?
On the Job, Beauty Is More Than Skin-Deep