Insurance Needed in Sound Financial Management

Rawpixel.com /Shutterstock

Most people know they need sound financial management. It starts with establishing a budget and then using it to set and meet financial goals. There are short-term and long-term goals, and it takes hard work and discipline to achieve them.

But in the course of planning finances, many people overlook a safety net. All your plans and hard work can disappear overnight if you don’t have the correct safeguards in place. Insurance provides a stopgap to disaster. But what insurance is important to incorporate in a sound financial plan?

Financial Safety Net

Insurance can be seen as a wager. You’re betting that you’ll need it, and the insurance company is betting you won’t. It’s the least favorite expense most people have.

The result is many people ignore insurance. Over 100 million Americans are uninsured or underinsured when it comes to life insurance. And 65 percent of the private sector has no long-term disability insurance. These people don’t have a financial safety net.

If you are prepared for the unexpected, you’re less likely to be set back financially. An unexpected illness, property loss or death has hijacked many financial goals.

Insurance mitigates a person’s risk; it’s a tool needed in the financial management plan. By compensating for a loss, insurance policies provide security from catastrophic emergencies.

Insurance Diversifies Portfolio

Some people use insurance to diversify their portfolios. This is especially true for those in a higher tax bracket who have maxed out their retirement plan contributions.

Many individuals will use cash-value life insurance to spur tax-deferred growth. But beware that if you withdraw any amount of cash more than the total premiums you paid toward the cash value, it will be taxable.

Life insurance is not correlated to market performance. Many assets are comprised of stocks, bonds or mutual funds that may fluctuate. Just because you have a strong portfolio today doesn’t mean it will be there for your heirs. Having a product in your portfolio that is not tied to market performance is a good practice.

Insurance Provides Quick Liquidity

Many people have illiquid assets like real estate, long-term investments or businesses. This causes problems in wealth transfer taxes and costs. Life insurance provides immediate liquidity upon the insured’s death.

It must also be noted that liquidity doesn’t necessarily have to come with death. Some policies can be accessed while alive.

Types of Insurance Needed

There are five types of insurance that most people need to protect their finances:

1. health
2. life
3. disability
4. auto
5. home

Most people know they need health insurance. Even if you have catastrophic health insurance with a high deductible, it could protect you from financial ruin. In 2021, approximately 9.2 percent of Americans were without coverage. Sixty percent receive their insurance from an employer or the private insurance marketplace.

The remainder of Americans receive their health insurance from Medicare, Medicaid, or the Affordable Care Act.

Auto insurance is also a no-brainer. But, having adequate liability limits is imperative to protect your finances. Also, ensuring you have both collision and comprehensive coverages can save you money if there is a wreck or flood.

Long-Term Disability Insurance Protects

The Social Security Administration says one in four workers in the workforce will become disabled before retirement age.

You might have health insurance for the medical bills, but long-term disability covers everyday expenses. In other words, it becomes your livelihood. Policies pay 40–70 percent of your previous income.

Although many employers offer short-term and long-term some employees choose not to take it. That takes a key weapon out of the financial management arsenal. Loss of income due to an accident or illness can destroy a savings plan, including an investment strategy.

Why People Avoid Insurance

Most people know they need insurance, but it’s not a priority for some. Instead, building a savings account or making investments is the chief focus.

It’s difficult to think about the worst-case scenario. Fear sometimes creates paralysis.

Lack of education is another reason people avoid insurance. It can be confusing trying to figure out what risks you have and what insurance policies are needed to cover them.

This is when research and a trusted advisor come in handy.

Update Insurance Yearly

You don’t make investments and then ignore them; insurance is the same way. Insurance policies aren’t set it and forget it contracts. They should be reviewed yearly. Life changes need to be accounted for.

You may have a higher income than the previous year and need to adjust the disability policy. Or a new baby may warrant increased life insurance limits.

When was the last time you updated your homeowner’s policy? If you’ve increased the square footage of your house or are about to, it’s time to call the insurance agent.

A new dog or building a pool may also mean increasing liability limits.

Life constantly changes. Just like your finances are fluid, so are your insurance needs.

The Epoch Times copyright © 2023. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.