There are so many types of insurance out there. As my attempt at comedy, I like to say you could fill up your entire budget space with insurance - home and auto, liability, life, health, disability, product warranties, mortgage insurance, the list goes on and on. I'll be completely protected, but I might starve to death. So, it begs the question, what insurances do I actually need?
It depends.
It depends on one's life circumstances and appetite for risk. Let's back it up a step first though and ask some questions about risk in general: Can I avoid this risk altogether? For example, not taking up sky diving as a side hobby. Can I reduce this risk from happening? For example, I choose to drive in rush hour traffic less often. Should I just accept and retain this risk myself? For example, I might need long-term care someday, but I think I have enough cash reserves to finance it. And lastly, should I instead transfer this risk to somebody else? This is where insurance comes in handy. Let's examine a case study.
I buy an electronic product. At the sale, they ask me to purchase a warranty (or insurance, really) in case it breaks while I own it. This is a transfer of the risk of loss on this item to someone else, and I pay for that as a premium. Quick mental math tells me that if I take care of this item, it has a manufacturer warranty on it already, and I can replace this item easily or will be obsolete in a few years, the insurance is probably not worth it. Ok, so let's substitute me for the electronic item. If something happens to me (death or disability), what might be the consequences? If I cannot avoid, reduce or accept the risk, then I can transfer that risk to insurance and pay for it. Personally, my income has a high value others solely rely on, so I'll protect this value way cheaper with insurance than I can by retaining the risk myself. Certainly, I can also be smart and control my behavior such that I reduce the risk, but in case the worst happens…this is one of those low likelihood but high consequence things I want to protect against.
In summary, the first step is to consider avoidance, reduction, acceptance or transference. We can use this same mental model and approach in the case study to evaluate a risk and then any insurance we think we might want or need. Here is a list of just some insurance options we might consider personally having:
Life insurance
Disability insurance
Health insurance
Dental insurance
Vision insurance
Long-term care insurance
Home insurance
Auto insurance
Umbrella liability insurance
Product liability insurance
Errors & Omissions insurance
Annuities
Wait, annuities? Yes, this is an insurance contract. You pay for the guarantees provided by the policy.
Getting back to life circumstances helping to decide which insurances you need: If you are a young and growing family, you are probably thinking about life, disability, health and dental, home and auto insurance. If you are a retired person in your 60's, you are considering long-term care, annuities, Medicare, supplemental medical and dental insurance, among other things. And the parameters to configure each of these insurances will vastly differ for each person and circumstance. Small business owner? Risk management and insurance can be accomplished several ways and for different intents or purposes.
If you need help sorting through what you might need and NOT need and why, give us a call. We take a comprehensive view of your entire planning landscape, not just products. This is something we do every day to help others set themselves up correctly and confidently. Schedule your FREE consultation with us today! Until next time, blessings to you and yours.