Risk can be a tough thing to manage properly since your life is constantly changing and there are so many types of insurance products in the marketplace today. Not only are there dozens of insurance areas, but each area has many policies you can buy, each with different nuances. Whereas an investment portfolio can be a bit more predictable in terms of its makeup, it is not so for insurance. Most individuals would do well with the assistance of a risk management professional. We at TFC are professional advisors with a background in Risk Management, as it is a key facet of the financial planning process. Let’s dive into the different types of insurance – perhaps this will help you decide what you need and what you might NOT need.
Generally, if an event has a low frequency but a severe loss potential, you want to transfer the risk – meaning you want to purchase insurance to transfer the risk.
| Loss Characteristic | High frequency | Low frequency |
| High severity | Risk avoidance (just don’t do it) | Risk transfer (buy insurance) |
| Low severity | Risk reduction (just do it less or safer) | Risk retention (don’t buy insurance) |
- Life insurance – Term, whole, universal. This is a big deal and something you likely need. Only those individuals who have no dependents, are not married and have ample assets may not require.
- Health insurance – High deductible, low deductible. Health insurance is also critical to have. A single illness or hospital stay & procedure can wreak havoc on your financial plan if not insured. Most bankruptcies are due largely to health-related events that are not properly insured against. Also consider you may purchase health insurance for you OR you & your family. Often we are essentially required to buy it through our employer as the private market can be very expensive for a comparable plan. If you have a high-deductible health plan, you may also contribute toward a Health Savings Account.
- Disability income insurance – Short-term and long-term. This insurance is often a benefit wrapped into your paycheck. You may want to consider purchasing supplemental disability income insurance if you have high expenses.
- Long-term care insurance – This can be prohibitively expensive if you do not purchase the policy well in advance of retirement. The ideal time to buy it is when you are aged 50-55 to get the best price for your coverage.
- Automotive insurance – We all know this fairly well. It is of course mandated by law that we have it if we drive a car. But how much should you buy and what coverage should you have? It can depend on your risk tolerance and your driving habits. You want to be sure to have coverage for uninsured drivers, which can be somewhat controversial since you may say, ‘why do I want to pay for someone who isn’t paying for themselves?’ Well, if an uninsured person gets injured in an accident you are involved in, you could be liable for their bills.
- Homeowner’s insurance – this protects against adverse events that occur on your property. It is sometimes included in your mortgage and purchased during the home-buying process.
- Renter’s insurance – If you are a renter, you may have assets you want to protect in your home.
- Small business insurance – If you are a small business owner, you have a whole slew of insurance policies you likely need: general liability, property, workers’ compensation, commercial auto, general liability, professional liability.
- Property insurance – Do you own expensive jewelry or art? It is likely worth insuring those items in case they are stolen or destroyed as they might not covered in full within your homeowner’s insurance.
- Annuities – you may think annuities are an investment product, not insurance. Well, annuities help protect the risk of living too long – meaning the risk of outliving your money. It works the opposite of life insurance. Instead of paying monthly premiums in exchange for a lump-sum upon death, you make an upfront payment in exchange for periodic payments during retirement that is guaranteed until you pass.
The above insurance types are generally advisable to purchase, but there are also some things you probably don’t need to insure. After all, when you buy a policy, someone is sometimes ‘selling’ it to you, meaning the salesperson may be earning a tidy commission on the sale. TFC is here to help you sift through the risks you should insure against and the ones you should not. Here are some things you can probably risk not insuring.
- Identity theft protection
- Credit monitoring
- Pet insurance
- Travel insurance
- Appliance & electronics insurance & warranties
Here’s the point
- There are many types of insurance you can buy, but some you can forgo. Our library of financial planning topics has more details on specific insurance areas.
- If a loss has a high financial impact severity but low frequency, then you want to insure against it
- TFC is here to help you select the risks to insure against and find the best policies that meet your needs
Action Items
- Write down your biggest assets & risks, then asses if you are properly protected if there is an adverse event
- Sit down with TFC to review your Risk Management plan. It is a key piece of your overall Financial Plan
- Be sure to review your policies and risks as life changes often, and that means your insurance needs change too.
Photo by Ulises Baga on Unsplash