While some unfortunate events in life can be expected, such as death, taxes, and car repairs, other happenings come as unexpected and unwanted surprises, like serious illness, accidents, and adverse weather. Thankfully, we don’t need to face an uncertain future without financial protection—that’s why insurance exists. To be prepared for both the expected and unexpected, you need to understand the importance of insurance in your financial plan.
Contact us to schedule a no-cost insurance review with Good Life Financial Advisors of NOVA!
Why Do I Need Insurance?
Insurance is probably the most expensive item we buy that we hope we will never have to use. But paying for insurance is a much safer alternative than hoping for the best and paying everything out-of-pocket.
Imagine that you cause a car accident and don’t have insurance. Not only are you on the hook for fixing your own car’s damages, but you’ll be responsible for the injuries and damages caused to the other car and driver. Plus, if that driver needs a hospital stay to recuperate from injuries, you’ll likely be draining your investment and retirement accounts to cover the costs.
But with insurance, you’ll give yourself a level of financial protection from unexpected events such as car accidents. Let’s say a person with a $300,000 auto policy is involved in that same accident. Instead of being forced to pay out-of-pocket, the insurance company will cover damages and expenses up to $300,000.
How Does Insurance Protect Me?
All types of insurance function on the same basic premise. The insurer sells a policy to the consumer in which the consumer pays a monthly premium. Those premiums are put into a pool with the premiums of other insureds. Money can then be distributed when an insured individual has a covered loss.
Insurance companies utilize something called “adverse selection” when determining who to extend an offer of insurance coverage to. Adverse selection is the tendency for those who have high-risk lifestyles or dangerous jobs to purchase products such as insurance. To protect themselves from paying large claims due to these risky individuals, insurance companies raise their premium rate and/or limit coverage. This allows insurance companies to greatly profit from the premiums and pay out less in claims than they receive in premiums. That’s why insurers price policies differently depending on the type of coverage and the status of the person requesting the policy.
Take health insurance for an example. Younger people are cheaper to insure since they’re less likely to get sick, so premiums for healthcare tend to increase with age. On the contrary, young people are more likely to be involved in car accidents, so auto insurance tends to get cheaper as you get older.
What Needs To Be Insured?
Insurance is available for a number of different aspects of our life. So what should you insure? You should insure those areas that would cause a catastrophic loss if a loss were to occur. An iPhone that you’ll likely be upgrading from in two years probably doesn’t need to be insured. But the home you plan on living in for decades? That’s a different story. Here are the most common things people buy insurance to protect:
- Our health. Getting sick is expensive, especially if you need surgery or a long hospital stay. Outstanding medical bills can sink credit scores and lead to wage garnishment.
- Our assets. If you’re found responsible for a car accident and don’t have proper insurance, you might have to liquidate some funds in order to pay the damages. Lacking common types of insurance can result in you needing to tap personal accounts should something bad happen.
- Our loved ones. We saved the most important one for last. Although it can be difficult to face your own mortality, you have to keep in mind what would happen to your family and loved ones if you got sick or passed away. Insurance isn’t just about protecting our personal assets, but also for providing security.
How Much Insurance Do I Need?
Purchasing insurance is a very personal decision. A 21-year old fresh out of college who’s looking to enter the workforce will have drastically different insurance needs than a 55-year old father of three who has retirement in his sights.
When we buy insurance, we not only have to take into account how much we can afford, but also how much we can’t afford when it comes to lacking protection. Not everyone needs a $300,000 auto policy, but we all need some type of car insurance if we want to drive. Same with health, home, and renter’s insurance—we all need some level of security, but how much varies from person to person. If you have insurance questions, consult your financial advisor and let them know your concerns and goals. A good advisor will make insurance a critical part of your personal financial plan.
Work with a Professional
To be prepared for both the expected and unexpected, you need to understand the importance of insurance in your financial plan. It’s also crucial to find the right financial advisor to assist you in creating a plan that works for your specific needs. Contact us to schedule a no-cost insurance review with Good Life Financial Advisors of NOVA!
This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice.