The Role of Insurance In Your Financial Plan

Insurance plays a large role in your financial plan because it protects many areas of your life. Health insurance protects you from illness, auto insurance protects your car, and disability insurance protects you from going broke if you become incapacitated. The subject of insurance isn’t necessarily a fun one, not just because it forces us to think about awful scenarios, but because it involves paying for a product that we hope to never use. But uncertainty is out there, and insuring ourselves from uncertainty isn’t just a prudent financial move, it’s often required by law.

If you need assistance with your finances, work with a professional financial advisor from Good Life Financial Advisors of Mt. Pleasant. We’re ready to help create a personalized plan for your specific needs.

How Does Insurance Work?

Insurance products exist by the hundreds, but they all have the same basic structure. When we buy an insurance policy, we’re agreeing to shift some risk of financial loss from ourselves to the insurance company. In exchange for this protection, we pay fees to the insurance company called “premiums.”

The premium amount will vary depending on the type of insurance and level of coverage purchased, plus a few additional factors pertaining to the individual purchasing the policy. Many states have laws regarding what factors insurance companies can use when calculating premiums. For example, California forbids auto insurance providers from using credit score or gender in their formula for policy pricing.

One way to think of insurance is like a giant emergency fund that thousands of clients contribute to. Insurance companies collect regular premiums from these clients and use that pool of money to pay for things like medical bills following car accidents or replacing valuables destroyed in a house or apartment fire. If you get into a car accident (that isn’t your fault) and you have a $300,000 auto policy, the insurance company will cover the financial fallout of that accident up to $300,000. Since major car accidents are rare, insurance companies usually profit from these agreements.

Types of Insurance

People buy insurance for all kinds of protection. Even our smartphones and electronic devices can be insured from destruction and damage, although most economists will tell you insuring small, replaceable things is unnecessary. But insurance is a smart purchase in many circumstances—especially when it’s required by law. Here are the most common forms of insurance:

  • Health Insurance. This covers (some of) the cost of doctor and hospital visits, plus prescription drugs and other medical costs. Many Americans get health insurance from their places of business, but others purchase policies on the open market.
  • Auto Insurance. Car accidents are expensive. When we get in a car accident, auto insurance covers the resulting medical bills and property damage. Every state requires drivers to purchase a minimum level of auto coverage, but this coverage is often inadequate in a serious accident.
  • Business Insurance. Certain companies may require all kinds of different insurance, such as liability insurance, property insurance, and workers’ compensation. Needs will vary depending on the business and location.
  • Homeowners / Renters Insurance. Often bundled with auto, this type of insurance protects property and valuables from loss. Fires, inclement weather, theft, and other types of damages are covered under homeowners’ and renters’ insurance policies.
  • Disability Insurance. If you get hurt and cannot work, disability insurance will cover a portion of your lost wages while you recuperate from your injury. Most people purchase disability insurance based on their job type and risk of injury.
  • Life Insurance. Here’s one nobody likes to think about, but life insurance is important if you have children or a significant other. If people in your life depend on you financially, life insurance policies will pay out your beneficiaries in the event of your death.

How Much Insurance Do I Need?

Insurance needs vary from person-to-person and business-to-business. A single 22-year old college graduate joining the workforce for the first time will likely need auto, renters, and health insurance, but probably not life insurance. A married father of two who takes the subway to work every day won’t need auto insurance, but certainly needs health and life insurance (and probably disability).

Figuring out the amount of insurance coverage we need is an important part of any financial plan. We often have no problems discussing risk when it comes to financial investments, but acknowledging risk outside the spreadsheet can be uncomfortable. Here’s where a professional advisor can come in.

Work With an Experienced Financial Advisor

Decisions on insurance come down to personal situations and individual risk tolerances. But formulating a plan with a professional financial advisor can help ease the burden of those decisions. A qualified advisor can help determine which insurance products to buy and what levels of coverage to get by using your financial goals as a starting point. Insurance is something we buy hoping to never use, but the peace of mind gained from knowing your loved ones and assets are protected is often worth paying for. Contact the team at Good Life Financial Advisors of Mount Pleasant today for assistance.