Don’t Forget Insurance As Part Of Your Financial Plan

October 2nd, 2010 admin 0 Comments

Planning for one’s financial well being is often thought to involve solely one’s investment portfolios. An investment portfolio for a “rainy day,” an investment portfolio for retirement (and then of course you may have a portfolio through your employer, one on your own, one from a previous employer, etc.) as well as your everyday emergency savings plan. However, there are other aspects to financial planning that are often overlooked, such as the matter of taxation, insurance, borrowing (credit) and estate planning. In many cases, we can overlook these other aspects because they often require “expert” advice from a tax accountant, an insurance broker, a bank or other lender, and an estate planner.

The area we want to look at today is life insurance. Specifically the two basic, different types of insurance that a regular individual and family should consider and why. This does not mean that other types of insurance, such as car insurance, house insurance, liability insurance, etc. are not important — often they are required by law — but life insurance is often seen as a discretionary type of protection, when in reality it is quite like the most important type of insurance of all.

Life Insurance exists as a way to protect your loved ones in the event that you should pass away. If you have balance insurance on your credit borrowings (like mortgage balance insurance or credit insurance on a line of credit, loan or credit card), life insurance serves just one purpose — to replace lost income.

In the event that you are looking to replace an individual’s financial contribution to the household, the general rule of thumb is to obtain insurance in the amount of seven to ten times that person’s annual income. For families with children, the greater amount should be chosen; families without children and much expenses can settle for the lower factor.

The seven to ten factor applies to both the primary and non-primary earners. It becomes a little complicated when the non-primary earner does is a homemaker because expenses will vary from one household to another. In such instances, obtaining quotes or guestimating costs on what it will cost to replace those efforts is mandatory and then adding a gross-up value to account for a pre-tax earnings value is important.

For families without creditor insurance, it becomes important to explore such options. In some cases, it could be cheaper to obtain creditor insurance, or it could work out better to add it to an existing life insurance policy.

A common question is whether or not creditor insurance combined with life insurance creates an instance of over-insurance which is essentially wasted money. In most cases, there is not an instance of over insurance, unless then seven to ten factor is not adhered to because credit insurance will pay out the balance only, not provide a net benefit.

If you are in the process of looking at starting or updating your financial plan, remember to consider your insurance needs. As an often-overlooked financial essential, this is one area where most people are most vulnerable financially and the people who suffer as a consequence are those that the individual loved the most to begin with.