Whether you are saving for retirement or a home, life’s unexpected problems can quickly derail all your hard work. That’s why having the right kind and amount of insurance is an important piece in any financial plan.
Some insurance is mandatory, like automobile coverage, and more recently, health policies. Others are just as important because they mitigate the financial risks should something happen to you.
Here are three insurance plans that you should have to protect your future income and savings.
If you have a family and you love them, then life insurance is a must.
Term life insurance is a good choice as it becomes less and less expensive, and some policies do not require a health screening. You purchase basic term life insurance for a set period, say 20 years, and the insurer pays a lump sum to your beneficiaries should you die while the policy is in effect.
The death benefit helps to replace your income your family depends on. They can use it to pay for things like the mortgage on your home or for your children’s college education. This insurance is usually not necessary if you no longer have these large obligations when you retire and your kids are independent.
Permanent life insurance, as the name implies, lasts your entire life, and it pays a benefit when you die.
It is more expensive, but has a savings component, also called a cash value, which builds up over time. Some people use permanent life to pay federal estate taxes or to protect assets from creditors. Consulting a financial advisor with expertise in insurance is an effective way to find out what type of life insurance suits you.
Many great resources are available online to help you find the insurance that fits your needs. Bankrate.com has a terrific life insurance calculator to estimate how much coverage you should consider for your situation. Insure.com is a great source to learn more about all types of insurance and to shop for affordable policies and coverage.
PolicyGeniusis an easy-to-use online service dedicated to educating consumers about insurance. It offers information and comparisons of top policies without trying to promote or sending your information to the insurance carriers.
Long-term care insurance
This is something that most people should seriously think about given that the price for long-term care keeps going up. In 20 years, the cost to cover three years of care could exceed $300,000. It’s not surprising when you consider that at least 70 percent of people over 65 need long term-care services during their lifetime, according to Medicare’s estimates.
Insurance company Genworth has an interactive map that shows the costs of long-term care across the U.S. You can use it to calculate future care costs based on your state’s median.
For instance, the annual median cost for a private, one bedroom apartment in an assisted living facility in Virginia is $47,880 in 2014 and $116,217 by 2044. A private room in a nursing home jumps from $84,315 to $204,655 in 30 years.
There are two types of long-term care policies, traditional and hybrid. The former is relatively straight forward, writes Keith Eig, a long-term care insurance specialist at Greenberg, Wexler and Eig LLC.You pay premiums to an insurance carrier for the duration of the contract, much like term life insurance. If you don’t use it, you don’t get the money back for those premiums.
The hybrid policy has a type of cash back provision. You make a one-time up-front deposit (typically $50,000 to $150,000). This deposit funds a pool of money that pays for long-term care in addition to a death benefit.
If you die before the long-term care benefit pool is used up, your beneficiaries receive a death benefit. You can potentially get all your money back should you never need to receive long-term care.
Extended disability coverage
An injury or illness can leave you without income for a long time. While one in four of today’s 20-year-olds has a chance of becoming disabled before they retire, only 29 percent of Americans own disability insurance.
Even if you’re one of the fortunate few who has long-term disability coverage through your employer, you may still want to look into supplementing that with an individual policy, because many employer-based plans only provide benefits if you’re totally disabled.
If you don’t have disability insurance or you want to add to the benefits you receive through work, you can expect to pay between 1 percent and 3 percent of your gross salary annually for the premium. Most disability policies pay out 40 percent to 60 percent of your base salary. If you pay the premiums, then any benefit paid out is tax-free. If your employer pays the premium, then your benefit is taxed, which means less money coming to you.
Let’s be honest, insuring for all the what-ifs in life can be confusing, time consuming and expensive. But the alternative could be potentially devastating to you and your family. Find out the policies that meet your needs with the resources listed in the article and add a layer of security to your finances.
Barry Glassman is the founder and president of Glassman Wealth Services, a fee-only financial planning firm in McLean, Va.