The World of Insurance
By definition, insurance is “coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril.” A specified contingency or peril is a risk. In essence, insurance provides people with peace of mind against risks. Every contract provides different protection at different costs, and should be reviewed on its own to determine if it meets your needs. This is an overview on the various types of insurance, which we will explore more fully in future articles.
When considering insurance, determine the risks that you and your family have, and take time to understand them. Next, assess how much risk you can handle (or self-insure) versus how much should be covered by an insurance company. Where they exist, deductibles and co-pays adjust the level of self-insurance that you have. Finally, it is important to trust that the company providing the insurance will be there to fulfill its obligations. This trust can be enhanced by ensuring the company has good financial strength ratings from a third-party rating agency. Some common examples of coverage:
- Health
- Auto
- Homeowners
- Umbrella
- Life insurance
- Disability
- Long term care
Everyone should have health insurance which covers medical costs. In many cases, health insurance is provided as an employee or government benefit and covers both minor and major risks. Since major health expenses can create substantial financial hardship, this is the first insurance anyone should be certain they have. Medical plans can have varying levels of deductibles that impact the cost of medical care when you receive it. Higher deductible plans generally have lower premiums. A high deductible medical plan has you paying for a large portion of your care, but has the insurance company covering catastrophic losses. This is an example of increasing your self-insurance. Dental, prescription and vision insurance are variants of health insurance.
If you own an automobile, this insurance covers the risks of owning and operating it. The only two states that do not require auto insurance are New Hampshire and Virginia. This insurance covers people hurt in a car accident and damages to the car and other’s property.
If you own a home or rent a residence, homeowner’s (or renter’s) insurance covers the risks associated with it. Property damage is the most common use of homeowner’s coverage, but the liability portion covers you should someone be injured on your property. Renter’s insurance covers the personal property of the renter. If there is a mortgage, most lenders require homeowner’s coverage. Dependent on the location of the residence, there may be additional coverages that should be considered such as flood insurance. Flood damage is not covered by normal homeowner’s insurance.
If you have substantial assets, consider umbrella liability which provides coverage beyond that provided in automobile and homeowner’s contracts. This protects other assets that individuals own so they are protected in the event of a lawsuit. This can be an important coverage to avoid asset loss.
To protect against the loss of an individual’s income, life insurance provides a benefit on death and disability income insurance provides a benefit on a sustained disability. Life insurance can also provide funds to cover final expenses.
There are two primary types of life insurance. Term insurance provides pure protection for the insured for a specified period of time. It is an efficient way to address the need for income replacement. It is generally less expensive for younger individuals and can be the best way to address pre-retirement needs; term insurance provided by employers (group life insurance) can be a good foundation for this need. Whole life insurance combines a savings element with pure protection to level the cost of protection over an individual’s lifetime. Both term and whole life insurance have their place in a financial plan.
Just as death can result in a loss of income, disability can as well. Disability income insurance provides for the replacement of that income in the event that the insured is unable to work. Disability can be either short-term (usually 6 months or less) and long-term (more than six months). Some employers provide group disability income protection.
To protect your assets from being exhausted by a stay in a long-term care (LTC) facility, consider LTC insurance. Depending on the policy’s terms, LTC insurance covers nursing home stays as well as home care equivalents. Most states have minimum requirements for LTC contracts, which if met, will allow access to Medicaid benefits without a need to exhaust an individual’s assets.
As always, if you have insurance questions please reach out to us at (833) 888-0534.
Michael DuBois and West Branch Capital do not sell insurance products but can assist in your insurance analysis needs. Mike can be reached at mdubois@westbranchcapital.com.
About The Author
Michael DuBois
Mike is a Managing Director and Personal Risk Management Specialist. Mike brings forty years of insurance industry experience to West Branch Capital. He will focus on advising clients on annuities, life insurance, retirement products, disability income, long-term care insurance and other insurance products. He will evaluate the quality of the options available to clients and make independent and objective recommendations as part of the firm’s holistic advisory approach to clients’ wealth and risk management needs. In keeping with the firm’s tradition, he will not “sell” any insurance products or policies. Prior to his retirement as an actuary from MassMutual in 2019, he was a regular speaker at actuarial conferences, served as an advisor on studies by the Society of Actuaries (SOA) and participated in the education and examination committees of the SOA. Mike is a graduate of Rensselaer Polytechnic Institute, a Fellow in the SOA (FSA) and a Member of the American Academy of Actuaries (MAAA).
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