The Core of Financial Planning 4/1/07
Stewart H. Welch III, CFP, AEP
Founder, The Welch Group, LLC
4/1/07
The Core of Financial Planning
4/1/07
“The Core of Financial Planning “
4/1/07
When people discuss financial planning, the conversation usually centers on investing, planning for children’s education, retirement planning and perhaps, wills. The step-child of the planning world involves the one area that is at the very core of planning… insurance. If you equate financial planning with building a home, insurance represents the home’s foundation. There are six main building blocks:
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Life insurance. The key purpose of life insurance is to replace income for dependents should the primary breadwinner die prematurely. If the husband is earning the living while the wife is raising the children, focus first on adequate life insurance on him. If both parents are working, life insurance should be considered for both spouses. The non-earning spouse should have enough life insurance to fund hiring someone, such as a nanny, to replace what she would otherwise do at home. Most common mistake: Not enough life insurance to replace lost income.
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Health insurance. I find most employed individuals generally have adequate health insurance coverage through their jobs. If you don’t have coverage through your employer, most states offer coverage but the costs, adequacy and exclusions vary widely by state. Most common mistake: People inadvertently allowing coverage to lapse.
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Disability Income. Perhaps the most overlooked insurance coverage is disability income insurance. Through this coverage, the insurer agrees to pay you an income should you become disabled through accident or sickness and cannot earn a paycheck. Many larger companies offer group disability coverage either through payroll deduction or paid for by the company. Adequate disability coverage may be even more important than life insurance, since if you become disabled, your disability may significantly increase your family’s expenses. Most common mistake: Not enough coverage to cover basic monthly expenses.
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Homeowners insurance. Whether you rent or own, you’ll want to have adequate homeowners insurance. Homeowners insurance is a complex area of coverage with many options to choose from. Most common mistake: Not enough insurance on dwelling.
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Auto insurance. Auto insurance is important not only because you’ll want the insurance company repair or replace your auto if you’re in an accident but owning and driving a vehicle significantly increases your risk of being on the wrong end of a lawsuit. Liability is a risk you’ll want to shift to the insurance company. Most common mistake: Being underinsured for collision coverage.
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Umbrella liability insurance. Separate from the basic liability coverage included in your homeowners and auto coverage, many people choose to add a rider, umbrella liability coverage, which bumps up your liability coverage by $1 million or more. Most common mistake: No coverage.
For people over the age of fifty, long-term care insurance is fast becoming the seventh building block of financial planning. Long-term care insurance is, in reality, a specialized form of disability income insurance. It will pay for the expenses of custodial care should you become disabled and need the assistance of a healthcare professional.
As you think about these seven types of insurance, ask yourself this question, “Do I have adequate coverage in each area?” If you are not certain then tune in to this column over the next several weeks as we explore each area in detail and reveal some of the secret ‘tricks of the trade’.