Risk Management: Protecting your Assets

As you progress through life and build your wealth, it becomes necessary to protect yourself, your family and your assets. The most common way to protect is to buy some form of insurance. When you buy insurance, you shift the risk to a third party and away from you. At different times in your life, it will be necessary to have different levels of protection. In some cases, being self-insured is an alternative.

Life Insurance

If you have anybody dependent upon you, life insurance is essential. The purpose of life insurance is to replace your income for your loved ones. As an example, if you make $50,000 per year, a policy of 10 times that amount would replace your income if invested with an average return of 10%. Always purchase term life insurance. It is the most cost-effective.

Homeowners

When you reach homeownership status, insuring that asset will be important. Purchasing a home is the single largest purchase many folks make in their lifetime. If you have a mortgage, the lender will require you to purchase insurance. Not for you, but for them.

Make sure you have adequate coverage, not just what the lender requires. Review the limits regularly to make sure you can replace what you have. In addition, you will want to insure the contents of your home and any rare collections you may own.

Renters should have a renter’s policy to cover the contents of their apartment. The landlord does not insure your personal belongings.

Auto

If you own a car, then it is certain you have purchased car insurance. It is required in all states. Make sure your limits are adequate. There are options for making this purchase. While the goal is to limit your risk, you may want to take on some risk in exchange for a premium reduction. As an example, a $500 deductible or a $1,000 deductible will have an impact on how much you pay. Explore your options.

Health

Health insurance is coverage that protects your well-being. This insurance will cover your expenses for health care. There are many types of coverage. Be sure to do your homework. Does a high deductible plan work best or will you be better off purchasing first-dollar coverage? Do you choose single coverage, spouse or other dependent coverage, or a family plan?

If you and your family are in good health, a high-deductible plan would work best when you team it up with a Health Savings Account (HSA) or a Flexible Spending Account.

In addition to health insurance, you will want prescription drug coverage, along with dental and eye coverage.

If you are 65, Medicare will be the coverage you will purchase. There are choices here as well. Do you sign up for straight Medicare or do you go with an HMO?  More choices, just make sure you do it by your 65th birthday or you will pay a penalty if you sign up late.

Umbrella

An umbrella policy will cover you for additional liability. This coverage will generally be in addition to the coverage you have with your homeowners and auto policy for liability coverage.

For example, if your liability coverage for your auto policy covers up to $100,000, an umbrella can increase that limit by a million.

As you build your wealth, this very affordable coverage will protect you should a claim arise.

Disability

This coverage will protect you should you become injured on the job. There are short-term and long-term coverages. What you buy will depend on what you do for a living. If your job is physical, such as construction, and you become injured, it is not likely you will be able to work, so you will want to have both short- and long-term coverage.

Many policies do not cover 100% of your wages, so understand what your benefit will be when you buy.

Long-Term Care

Long-term care coverage will cover you if the need to provide care arises when you will be in a nursing home. Many will need this service and coverage is available. The average cost of a nursing home is about $30,000 per year. The average time spent is about three years.

This coverage is best if purchased at age 60. The cost will be its most efficient at that age.

Malpractice

This coverage will insure against any potential liability that may arise from not performing to a specific level of service. This coverage is essential for doctors, nurses, lawyers and accountants, to name a few.

Limited Liability Company

LLC (Limited Liability Company) is a strategy that one can use to protect various assets. If you are a real estate investor, it may make sense to put various properties in an LLC. This will protect your other assets should an event occur.

As an example, if you had a real estate portfolio of $5 million, you may want to break down your assets into various LLCs. This will protect your assets if a case arose where only the assets in the LLC will be at risk. Assets outside that LLC will be protected separately.

Conclusion

The insurance market can be complicated. As always, do your homework. Do you need to purchase all of these coverages? Most likely no. Some of the answers will be determined by your overall financial well-being. Various coverages will be necessary at various times in one’s life.

The intent was to give you some direction as to the types of coverages available and what you will be protecting against. It is highly unlikely that you need to run out and buy coverages for everything discussed. Pick and choose where you can. Remember, the objective is to reduce your risk to yourself and your family.

Good luck!

You work hard for your money. Make sure it stays your money!

Thanks for reading. I hope you found this helpful. QCBN

By Steven Calabrese

Steven Calabrese, CPA, is the CFO of Polara Health. He is the owner-operator of a website known as thepersonalfinancewizard.com, where topics such as budgeting, investing, paying off debt and goal setting are discussed.