An important part of family planning involves the financial risks associated with owning a home, automobiles, and the risks of losing your ability to income due to illness or death, or medical costs associated with health problems that can eat in to a family’s income. Fortunately society has developed a system for addressing such concerns with various types of insurance.
When you look at the potential for loss and significant life changes that can occur in the event of the loss of a home, or loss of a sole provider of income, insurance is an essential plan of protection. It is a means of transferring the risks of loss to an entity that agrees to absorb those losses that otherwise could potentially destroy a way of life for a family.
A financial plan is really a risk evaluation. One of the first tasks is to put risks in order of importance, which for average American families might be life, home, and then auto, with the last two representing what are probably the greatest expenditures for an average family. When purchasing insurance as part of a risk management strategy, it is important to focus on cost vs. benefit.
PROPERTY AND LIABILITY
Owned property has several risks involved, including the loss of property, and the costs associated with its loss (loss of use). There are also has liability exposures associated with property ownership.
A home is the largest purchase an average family will make. The protection of this home from damage is what first party insurance is designed to do. The amount of insurance required on the home should usually equal the amount needed to rebuild the home in the event of a total loss. A homeowners policy is designed to cover your house and your personal property in the event that they are damaged, but it is a “package policy”, in that it also contains sections that deal with liability exposures. Coverage is available under standard home-owner’s forms for liability arising out of the owner’s negligent activities. It also affords coverage for medical payments, which will pay for medical bills if someone is injured on your property, regardless of fault. According to the Insurance Information Institute, the national average for the cost of home-owner’s insurance is $530.00 per year.
Property and liability exposures also arise out of the ownership and use of an automobile. A typical Personal Auto Policy will provide coverage for physical damage to your automobile in the form of collision coverage and comprehensive coverage. These coverages are optional, and will cost more in premiums, but they will provide protection against damaged to your vehicle subject to your deductible. The Personal Auto Policy will also afford coverage for damage or injury that you cause with your auto, within certain limitations, and it will also provide coverage for injuries you sustain if an under-insured or uninsured motorist injures you. Again, the Insurance Information Institute indicates that the national average for an auto policy premium is $735.00 per year (x2 vehicles) = $1,470.00.
LIFE INSURANCE
There are many types of life insurance policies, and life income techniques available, and to detail all of them would be well beyond the scope of this writing. A family with one wage earner at or below the national median family income of $52,500 per year has several costs to consider when making a weekly or monthly budget. After taxes, the mortgage, car payment, groceries, and a multitude of other costs, little may be left to pay for insurance. This is why it is very important for a young family to focus on immediate needs. If a source of income is eliminated due to untimely death, lack of income could result in the loss of a home. If the sole child-care provider dies the children and home will still need care while the primary income earner is out at work, which will cost money. Accordingly, two policies may be required for a typical family.
Choices of life insurance policies available include term insurance, and whole life insurance. There are several variations of each of these two basic forms of insurance, but each type of policy can be summarized. Term insurance provides a set amount of coverage for a predetermined period of time. After the specified period ends, that insurance is no longer available and a new policy will have to be purchased. This type of insurance is typically less expensive that whole life insurance. A whole life insurance policy provides coverage for a person’s entire life, and a portion of the premiums that a person pays is put towards a cash value that a person can cash in, or borrow against, later in life when the cash has built up some value. Often, this cash value can be used toward the purchase of other insurance such as a Long Term Care policy, which provides coverage for day to day health care that may be required in the event of a disabling illness or injury. A whole life policy will vary in cost based on what type of whole life policy it is, but the cost can be as much as 3 times that of a term policy providing the same dollar amount of coverage.
Because term insurance is the most readily available, this article will focus on its cost to a typical family. For a person in good health in their mid-thirties, a $500,000 term policy can be purchased for about $400. We will assume that two policies will be required for a typical household for a total cost of $800 per year.
HEALTH INSURANCE
The costs of health care are rising substantially, and this has driven health care costs up as well. Advances in medical techniques and equipment have done more to save lives and improve the quality of health care, however the cost of these advances is growing and will ultimately have to be borne by society. A 1997 National Survey of Employee-Sponsored Health Plans by Mercer/Foster Higgins shows that HMOs cost an average of $3,165 per employee per year.
In addition to basic health insurance, dental and vision plans are also available. A Dental Insurance plan can cost $239.40 per year.
RETIREMENT
While retirement is not a sudden and accidental event, it is a contingency that must be planned for and should be included in the risk management process. Outside of what you pay towards Social Security, the cost associated with saving for retirement is up to the individual, as is the method of saving for retirement. The goal in retirement planning is to maximize tax savings while building your nest egg, and a qualified financial planner should be consulted to examine the alternatives available.
UNEMPLOYMENT
This is may be a sudden and/or accidental event, and it is insured through the state that you live in. In the majority of states, the cost of insurance for unemployment is paid for by a tax imposed on employers. (Three (3) States require minimal employee contributions.) It can be assumed that employers will pass this cost along to its customers or its employees by a reduction in pay, but to quantify what this costs the employee is difficult to say. As with retirement, an individual is able to save whatever they choose toward an emergency fund to cover living costs during a period of unemployment.
ARE YOU OVER INSURED?
When added together, an average family will spend about $6,205.00 in insurance premiums. Costs for funding retirement and emergency funds for unemployment will vary depending on what is left. For the most part, the premiums that people will pay for basic insurance coverages are not necessarily related to the amount of income. For instance, a family earning the national average of $52,500 per year might be subject to the same insurance costs as a family making $30,000 per year or $75,000 per year. Lifestyle changes will govern the cost of premiums involved with property and liability exposures.
In addition to all of the risks noted above, there are several other insurance policies available to cover everything else. Here is a partial list:
Accident/disability, Cameras, Cancer, Fine arts, Furs, Golfer’s equipment, Hospital confinement indemnity, Hospital intensive care, Jewelry, Jewelry, Life, Long-term care, Motorcycles, Motor-homes, Musical instruments, Personal articles floater, Pets, Professional, Liability, Short-term disability, Silverware, Specified health event.
Evaluate your own insurance purchases to see if your premium expenditures are in line with the value of the insurance products that you need. The cost of insuring yourself may be prohibiting you from funding other necessary risk management strategies.