Financial Planning 101: Part Three
Protecting Your Family

by Gerald Townsend, Financial Editor
March 2009

This is the third article in Boom’s "Financial Planning 101" series. The previous two articles focused on setting goals and in managing cash flow. This month’s installment looks at family protection.

Life is full of risks. Some risks can be avoided. For example, we all know that smoking is not a healthful activity and it is a health risk that is easily avoided. Other risks can’t be avoided, but they can be minimized. There is a risk in driving a car, but if you wear your seat belt you reduce that risk. However, there are many risks in life that can’t be avoided and that can only be reduced somewhat, so the next step is to transfer that risk to someone else — the insurance company.

Property & Liability
If you own a car or a home with a mortgage on it, you don’t get any choice about insurance; it is required. Certainly there are options about the level of coverage and policy features, but not whether or not you have it. One of the easiest ways to save some money on this type of coverage is to consider having a reasonably high deductible. With some companies not renewing coverage after claims have been made, it makes sense to have a deductible as high as you can afford.

Auto and homeowner policies don’t just protect your property, but also provide a certain amount of liability coverage. However, in our litigious society, consider adding a personal umbrella liability policy, which provides protection beyond the limits of the auto and homeowner’s policies.

Medical Insurance
We are all aware of the high and rising cost of medical insurance. If your employer provides your medical insurance coverage as a benefit, consider yourself fortunate. Some employers make the insurance available, but the employee must pay all or a portion of the premium, although this may be done on a pre-tax basis.

Health Savings Accounts (HSAs) are a way of controlling health care costs and are available both for employer-sponsored plans as well as for individual medical insurance. HSAs combine a high-deductible policy with a pre-tax savings account that is used for medical costs. For 2009, the minimum/maximum policy deductibles are $1,150/$5,800 for individuals and $2,300/$11,600 for families. The pre-tax savings account funding limits for 2009 are $3,000 for individuals and $5,950 for families, and those 55 or older can put an extra $1,000 in the account.

Disability Insurance
Perhaps the most overlooked insurance protection is for disability. The most valuable asset a younger person has is their ability to earn future income. If this ability is diminished due to a disabling accident or illness, it represents a double tragedy. Not only is the income less, but also expenses continue and perhaps even higher than before.

Most disability policies only pay benefits for a limited number of years (e.g. 5 years) or to a certain age (e.g. age 60 or 65). Adequate personal savings might eliminate the need for short-term disability coverage and also allow you to have a longer elimination period for long-term disability coverage (e.g. 90-180 days), and therefore reduce the premium cost. Pay careful attention to the policy’s definition of disability — is it your inability to engage in your specific occupation or any gainful occupation?

Life Insurance
While we don’t know if we will have a major illness, disability or property loss, we all know that we will someday die. The question is who will suffer financial harm if we die? If you are single with no dependents, perhaps no one incurs economic hardship at your death. Even if others are economically dependent on you, if you have enough assets life insurance may not be necessary. On the other hand, without sufficient assets or guaranteed income to protect the needs of your family, life insurance is required to bridge the gap. How much do you need? See the accompanying article.

Other Insurance
There are, of course, many other types of insurance and reasons you might need them. For example, if you own a business there are additional risk and insurance considerations and long-term-care insurance is available to address the ongoing care needs of the elderly.

Avoid the risks you can, minimize the risks you can’t avoid, accept the risks you can afford, and insure against the risks you can’t avoid and can’t afford.