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You’re at risk for financial loss every day — risks such as illness, earthquakes and accidents could cause substantial financial losses. Still, few of us have a clear strategy for dealing with those risks, likely because few of us have knowledge of insurance policies.
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For instance, you can lose your home due to a fire outbreak or your job because of your injuries. Usually, the lack of proper insurance for these kinds of things can lead to losing all your money and may result in a financial breakdown.
That is why insurance is helpful in protecting against these shocks and any other unpredictable financial events in the future. However, not all insurance plans are the same, so managing insurance could be tricky if you don’t understand it.
Let’s dig into six tips for minimizing financial risk through insurance so that you may be able to plan effectively:
Assess Current Risks
Evaluating current risk is critical for effective planning and protection against financial losses.
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As Stu Sneen, CFP and Founder of Twoten Financial Planning, pointed out: “Risk is a part of life — our health, our property, our businesses, our careers, even our reputation — the list goes on.”
Therefore, the first step of the risk process is to figure out where you’re weak. These are the risks that are likely to occur the most: health problems that might require long-term care, the failure of a business or maybe even your home burning down if you’re in an area prone to that.
So, it’s important to zoom in on the ones that have personal meaning for you and prioritize which ones are necessary on your insurance coverage list. This way, you will be able to prioritize the most urgent ones or the ones that mean the most to you and your life in general.
For business owners, this might include property damage or liability. For the average Joe, health and life insurance are typically the ones that mean the most to them and their families.
Understanding this risk helps us identify which insurance coverages are the most essential to prioritize while minimizing the risk of leaving some areas coverage-free.
Choose the Right Coverage
The key is finding a balance between the cost of the insurance and what is actually being covered. Sneen explains, “The low-hanging fruit are life, auto, and disability insurance.” These fundamental policies serve as a safety net for the majority of life’s typical risks, though there may be instances where additional types of protection are needed.
Additionally, Sneen further warns that “You need to have the right life insurance. You do NOT want to be underinsured. Look at your family income, large debts (mortgage, auto loans and college loans) and future education costs for juniors.”
Equally, Wealth Advisory Group CEO Richard E. Craft says insurance of every type costs premium money, but too little or the wrong coverage can result in additional exposures.
Craft recommends that you look at the coverage amount: “You are better off getting $2,000,000 of 20-year term insurance than buying Universal Life and only getting $250,000.” This way, you can be sure to have enough protection for the most important risks.
Bundle Policies for Savings
It may be costly to purchase multiple insurance policies from different companies, and it can also be affordable to purchase multiple policies with the same insurance provider when you are insuring a home, auto and life.
“Be objective when you purchase policies,” says Craft. “It’s more about getting the right coverage with the right limits than convenience.” Still, you shouldn’t let that cost-efficiency get in the way of better coverage in these areas just because all the other parts of your life are covered together.
You might discover, for instance, that company A is cheaper than company B when it comes to car insurance and that company B is more accessible when it comes to homeowner’s insurance. The potential purchaser would then sift through your prices, quoted prices, and coverage amounts.
“You know, I might buy my car insurance from one top-rated insurer, and that homeowners or life insurance is best from a different good company,” stated Craft. It really depends. So, compare and contrast what is right for you to get the most coverage and cut costs in the process. This strategy allows you to maximize coverage while potentially reducing overall costs.
Regularly Review and Update Policies
The other risk minimization strategy involves regular review and/or changes to your insurance policies. With today’s outrageous real estate home values, you have a limited risk related to your insurance coverage.
Sneen explains, “With the rise in home prices over the past few years…it also puts buyers in a potential position to be underinsured and not have sufficient insurance coverage should they experience repair or rebuild costs as a result of today’s high cost materials.” Doing so could land you in a place way too long and hard if the market implodes.
Sheen also warns that you can lose your home to fire and still not be fully covered. This may leave you in a difficult position because you cannot afford to rebuild the same home under today’s construction prices.
Craft also emphasizes to “keep your coverage amount up-to-date if, for example, you get married, have a child, or move into a new home.” He also recommends reviewing policies every five years to be safe or at least after a few years “of life changing incidents,” but even if none of these developments disrupt your way of life, inflationary rates and price shifts should be cause for consideration in reevaluating an existing policy.
Consider Life and Disability Insurance
Among the insurance coverages that are often forgotten are the everyday life and disability insurance policies. But that matters because they defend the financial risks to your family.
Sheen often asks his clients, “Do you have a clear idea of what will happen with your family, if you do not wake up in the morning? What if you are disabled tomorrow?” While those things are certainly not what should be on your mind every day, this could easily be your reality tomorrow and this is why you need to be insured against the right life or disability policy.
Life insurance is particularly useful because it can help provide an income for the family or other survivors when you pass away. By contrast, disability insurance pays out to someone who can not work because of a disability.
Richard E. Craft also backs up this claim when he mentions: “The ability to make a living is life’s most important asset, and it should not be left unprotected.” Craft suggests a life insurance policy equal to 10 times your annual income and disability insurance at 60% of the individual’s wage.
Experts also recommend that people be aware of employer policies that may not be portable. This leaves the employee with gaps in coverage once they have left to work for another employer.
Understand Policy Exclusions
It is easy to think that your insurance will take care of whatever goes wrong. However, there are cases when the insurance fails to provide coverage. Each policy has exclusions. Knowing them is vital so you won’t be shocked later. Craft advises: “When it comes to exclusions, ask your agent or broker about what is excluded in plain talk.”
Craft further recommends asking, “Do I have protection for my home against natural disasters and storms, or do they have limitations?” and “What if I get sick? Are there any pre-existing conditions or limitations on my policy?” This is to keep you from having surprises and safeguard yourself.
Aside from knowing exclusions, it is also important to examine any additional coverage options that can be added to your policy since a standard policy may not be covering some of the risks you want covered.
For example, if your policy does not cover flood damage or specific health conditions, adding a certain coverage could make all the difference.
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This article originally appeared on GOBankingRates.com: I’m a Money Expert: 6 Tips for Using Insurance To Manage Financial Risk
