Managing Risk: The 4 Pillars of Financial Protection

“Life is uncertain; eat dessert first.” We don’t know who first said this about managing risk, but it’s hard to argue with, especially with a fork poised over a plate of tiramisu. While life is — at that moment — sweet, it may not always be that way. Every day you leave your comfortable home, get into your comfortable car, go about your life and return safely. But that’s not true for everyone. Each year there are about 6 million auto accidents, more than 385,000 house fires and over 36 million hospital admissions.

Uncertain indeed. But if disaster strikes, will your financial well-being, too, get caught in the crossfire? Of course, that’s what insurance is for — managing risk — and to provide a buffer against the financial impact of unforeseen events.

The question is what kind of insurance do you really need, and how much of it? While you may need additional types of policies, the four primary pillars of financial protection are auto insurance, homeowners insurance, health insurance and life insurance. Here’s how they work.

Automobile

Auto policies are required by 48 states to operate a motor vehicle. Each state sets its own rules as to the type and amount of insurance drivers must carry. Here are some of the components of most motor vehicle policies.

• Bodily Injury covers you if you cause an accident; most experts recommend $100,000 per person and $300,000 per occurrence.
• Property Damage Liability covers you if you damage someone else’s property (a car or something else).
• Collision coverage pays for damage to your car if you run into another car.
• Comprehensive covers you if your car is stolen or damaged, such as by hail from a storm.
• Uninsured Motorist covers medical expenses if an uninsured driver hits you.
• Medical Payments coverage pays for medical treatment if you or your passengers are injured in an accident.
• Personal Injury Protection covers medical expenses for people involved in an accident. In states with no-fault insurance, it’s your policy that will pay if you are injured. If that’s the case, consider carefully how much medical coverage you might need for yourself should you be injured in an accident.

The amount of insurance you should carry for managing risk depends. How much will it cost to replace your car? Do you often have multiple passengers in your car, say your family? Discuss your needs with a qualified insurance agent and find out whether your state allows “stacking,” which lets you combine or “stack” policy limits to achieve a higher level of coverage. Consider this in the context of being sued by another driver, who might attempt to take financial and other assets from you in a lawsuit.

Homeowners

While policies exist managing risk and covering many contingencies, the important clauses include:

• Physical structure coverage that protects the actual house itself and usually the land it sits on.
• Personal belongings coverage that protects your furniture, electronics, clothing and other items inside the house.
• Liability protection that pays if you are sued for an injury suffered on your property, say while a neighbor was helping you clean your roof.
• Additional living expenses coverage, for costs that might be incurred if you have to move out of your home while it’s repaired or rebuilt after a disaster.

An insurance professional can help you determine the right coverage for your dwelling. Home prices have recently escalated sharply and if you haven’t adjusted your coverage, you could find yourself underinsured. It’s critical to know if your physical structure and personal belongings are insured for their “cash value,” which could be the cost of replacing the items minus a significant amount of depreciation, or the “replacement cost,” which is literally the cost of replacing your home and belongings with brand new items.

Health

Sadly, an astonishing half-million families declare bankruptcy each year due to medical debt. Adequate medical insurance (and doing what you can to maintain good health) can help protect you from this kind of financial disaster. While the Affordable Care Act did put in place some basic requirements for health policies, certain loopholes, deductions and co-pays in some policies may result in insufficient protection against the financial impact of a catastrophic illness. Review your own coverage with these key areas in mind:

• Inpatient and outpatient care: What are the annual limits, and what prohibitions are there?
• Primary care and specialists: Must you get a referral from your primary care doc before seeing a specialist, and are your choices of primaries and specialists limited to a closed network of providers? What happens if you go outside of that network for care?
• Prescription drug coverage: If you take medications, make sure your medications are on the “formulary,” or drugs approved for coverage by your policy.
• Mental health coverage: What is the coverage for mental health treatment (inpatient and outpatient)? If so, is it limited in cost or duration?
• Diagnostics and imaging: Take note if there are significant limitations on advanced testing and especially imaging. An MRI can cost $5,000 or more without insurance; how much it will cost you depends on the language in your contract.

For many Americans, the health insurance coverage they have is determined by what their employer offers. Work with a qualified agent to review your policy and decide whether you wish to add additional coverage through a supplemental policy.

Life

If you were to pass away, what would the financial consequences be for your family? Life insurance is one way to provide support for them long after you’re gone. It can also be used as a way to pay out the heirs to a business if one of the partners or main stockholders dies. That way, the heirs get the value of the owner’s investment, and the deceased’s business associates can continue operating.

Whole life policies are often thought of as investment vehicles. Your premiums build up a cash value in the policy that, in many cases, you can borrow against. Any remaining policy value is paid to your designated heirs at the time of your death.

Term life policies are just that — the protection is limited to a finite term, say 10 years. If you pass away within that period, the policy pays your designees. If not, or you let the policy lapse, the insurance company keeps your premium payments. Many term policies can be renewed before they lapse, but the cost may increase substantially. Be aware that some term policies have premiums that rise each year as you age. Those that do not increase are called “level term” policies.

Hopefully, your long-term financial stability will never be challenged by accident or natural disaster. But in case it is one day, get advice from a qualified insurance agent, and put these four pillars in place for managing risk and to help protect you — and those you love.

Sources

https://www.driverknowledge.com/car-accident-statistics/

https://www.thezebra.com/resources/research/house-fire-statistics/

https://www.cdc.gov/nchs/products/databriefs/db427.htm

https://www.aha.org/system/files/media/file/2021/01/Fast-Facts-2021-table-FY19-data-14jan21.pdf

https://www.nasdaq.com/articles/medical-bankruptcy-is-killing-the-american-middle-class-2019-02-14

https://health.costhelper.com/mri.html

https://www.verywellhealth.com/should-you-buy-supplemental-health-insurance-1738638