Protecting yourself in uncertain times

Considering insurance needs is an important part of your financial plan.

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Key takeaways

  • Proper insurance coverage for disability, life, umbrella liability, and long-term care is important.
  • Your workplace coverage may not be enough for your needs, depending on your income and financial circumstances.
  • You may want to consult a financial professional or insurance specialist to assess your needs.

When's the last time you checked in on your plans for the future? Do you still have the same career goals? Is your retirement plan on track? Do you have what you need to maintain your lifestyle if your plans change—either by design or because of something unexpected?

While asset allocation can help you diversify your investment risk and estate planning can help safeguard your assets for your heirs, your financial plans might be most driven by your current and future income. To protect yourself in the event your ability to earn income is put in jeopardy, what you need most in your emergency kit is the proper insurance.

"Insurance works best when you have a low probability of something bad happening, but a really high cost if it does," says David Peterson, head of wealth planning at Fidelity.

People often think the insurance they can get in the workplace is enough, and some will take up the offers of supplemental insurance offered as a post-tax benefit. Most people can follow some simple guidelines, like buying term life insurance at 10 times your annual income. But that may not be enough for your personal needs, especially if your income is higher than the standard payout offered by most national firms or you have a complicated financial situation. Some types of insurance simply aren’t offered in the workplace. If that is your situation, you may want to get a more sophisticated insurance analysis done by an independent professional or by a financial company that specializes in such insurance policies.

"It is important for people to evaluate their complete risk profile, which includes exposures and risk tolerance. That will help uncover their insurance needs, from long-term care, health insurance, disability, and life to home, auto, and personal liability needs. Then a firm like ours, in coordination with Fidelity, can bring the appropriate resources to bear for those latter needs," says Bob Donnelly, national client experience leader at Marsh McLennan Agency (MMA) Private Client Services.

Here are the types of insurance you might want to consider to protect yourself down the road:

1. Disability insurance

More than half of US workers did not have disability insurance in 2020, according to Unum, a national provider of such insurance, and the number was an even higher 70% among Baby Boomers. But this type of insurance is an essential element to protecting your income stream in the event of an emergency.

"It's one of the biggest gaps most people have in their insurance needs," says Peterson.

Not to scare anyone, but there are so many things that could happen that could impact your ability to earn at the level you currently do, even if you could earn something at another type of job. Think about the sports star who blows out a knee and has to choose a backup career to make ends meet. An important factor to figuring out how much coverage you need is the payout percentage—most policies only offer 60% income replacement.

"That is a hard transition to make to less income, at all earning levels. But the dollar amount difference will be very large if you are a high earner, particularly if your lifestyle is dependent on that higher wage," says Peterson.

2. Long-term care insurance

Most companies do not offer long-term care insurance as part of a standard employee benefit package, but many now offer it as a supplemental option. Most group employee policies cost less than an individual policy would cost on the open market, and you can buy into at a younger age with simplified underwriting that could exclude you if you are older and develop health conditions.

If you are considering policies on the open market, you will face a vast array of choices, from traditional policies that offer a standard day-rate benefit to hybrid policies that combine long-term care with life insurance policies. There's a lot of fine print and conditions on most of these policies, like waiting periods, exclusions, and cost-of-living adjustments, so you may want to get the help of a professional to get the right policy to suit your needs.

Even if you are wealthy, the cost of a major health event may be hard to manage. Paying out-of-pocket for the care you need may end up diverting your financial plan.

"I think long-term care insurance makes sense no matter what your income, even if you think you have enough to cover the costs involved. Some people may have to lower their standard of living or adjust what they plan to leave to heirs in order to spend more on health care, especially if that care is going to run higher than the industry averages," says Peterson.

3. Umbrella insurance

Got a dog? Teen drivers? A pool? Really, just having any amount of assets and living a quiet life can still put you in the crosshairs of an expensive liability lawsuit. Umbrella insurance picks up where other liability policies leave off, both in terms of dollar limitations and scope of coverage. Put simply, it provides extra (or "excess") liability coverage and is effectively insurance of last resort, but coverage will not take effect until after other sources of coverage like homeowner's insurance or car insurance have been used fully.

"When we're looking at personal risk management, the umbrella and personal risk are most important. You have to arrive at a limit to protect the family, and a lot of what gets missed is their exposure profile," says David Russell, MMA's Private Client Services' national sales leader.

Russell notes that no 2 individuals are exactly alike, so even if their situations look the same on the surface, their exposures and risk tolerance could be completely different. For instance, some professions require additional liability coverage, or some people may have additional exposure from being on non-profit boards or having household staff.

4. Life insurance

Only 54% of Americans had any type of life insurance at all in 2020, according to LIMRA, the life insurance trade organization, and that number was down nearly 9%, over the last decade. While the pandemic ticked up life insurance policy sales at the start of 2021, that still leaves many without adequate coverage.

"For many people, life insurance can help manage risk, replace wealth lost to estate taxes, and be used as a non-correlated, tax-advantaged investment vehicle," says Peterson.

To figure out what kind of life insurance you need for the members of your family and how much, you may want to consult a financial professional, especially if your financial situation is complicated. They key step is to make sure the principal amount of the life insurance is enough to cover the income or financial obligations of the person covered. If that person makes $1 million per year, you need enough of a lump sum to invest that would generate that much income in a year.

"Some people think they'll get $1 million in life insurance because it's a nice number and sounds like a decent amount of coverage. However, when thinking about replacing a lost income, you need to look at whether that amount will provide their family with adequate income. Depending on your assumptions, that amount may only provide $30,000 a year. You have to do the math," says Peterson.

Your needs may be even more complicated if you are a business owner. Life insurance may play a critical part in your succession planning. If your business has multiple owners, you may want to structure something like a buy-sell agreement around life insurance so that if one partner dies, you can preserve the business while still allowing the family of the person who passed away to extract the funds they need.

If you're concerned you are not properly insured, you can review your insurance policies and calculate your needs, and then shop for insurance policies that suit your needs. You can also consult a financial professional to do an insurance assessment that will look at your whole financial picture and help you assess what coverage will work best for you and your family.

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