Although many individuals have various risk management policies in place, sometimes those policies get brushed aside and every once in a while the dust needs to be wiped off of them and perhaps some updating needed. Here’s a checklist to consider the next time you review your risk management strategies.
- Auto Insurance – Review your coverage to make sure it’s still adequate. Liability limits of at least $250,000 should be the norm. Limits of $500,000 up to $1 million are better. If you drive an older car, consider raising your comp and collision deductibles or eliminating them altogether to save on premiums. Upside down on your car loan? Consider gap insurance. Better yet, don’t have a car loan.
- Home Insurance – Make sure your home is insured to its reconstruction cost. This is the cost to rebuild your home using today’s prices for materials, labor, etc. It is NOT the fair market value. Often these numbers are vastly different. Liability limits should be at least $250,000, but higher amounts up to $1 million are better. Have a collection, jewelry, or other unique items? Consider endorsing them specifically. Endorsements provide specific coverage and deductibles for the covered items and override any limits in the original policy. If you recently acquired a pool or trampoline talk to your company. These items may have special requirements or not be covered at all.
- Life Insurance – Review your beneficiaries. Life happens and you need to consider if they need to be updated, or in the case of a divorce or other life event, changed. What type of policy do you have? Are you paying too much? Do you need more coverage? Do you need less? If you have coverage through your employer, is it enough (chances are it’s not)? It pays to spend some time reviewing these questions. If you’re confused, call a competent financial professional.
- Umbrella Insurance – This often overlooked coverage is extremely important to your risk management plan. Often the least expensive insurance coverage (as it rarely is needed) it’s still important if the worst happens. Generally, it’s coverage that’s in place if an individual exceeds their liability limits in an auto or home claim. Policies with $1 million limits can be obtained for as little as a few hundred dollars annually.
- Disability Insurance – The odds of an individual becoming disabled during their working lifetime are greater than dying prematurely. Many employers offer group disability. This is a great benefit. Individuals without access to group disability should consider purchasing a policy outright to protect their income. Be sure to review the definition of disability in the policy. Generally, cheaper premiums mean stricter definitions of disability. This means that while the premium may be less, it may be very difficult to file a claim if the definition of disability is strict – such as any occupation. Review the elimination period (time deductible) of the policy. Generally, the longer them elimination period (how long you wait until the benefits pay) the lower the premium and vice versa.
- Health Insurance – Review your policy to see if the coverage still makes sense. Review how often you’ve used the policy. If you’ve seldom gone to the doctor or made claims, consider a policy with higher deductibles. This will save on premiums. If you have a high deductible policy, consider utilizing an HSA.
- Emergency Fund – Generally, make sure you have three to six month of non-discretionary income set aside. Personally, I like a year’s worth. To each their own. Having an emergency fund can help pay for higher deductibles in any of the policies mentioned above. The higher the emergency fund, the higher your deductibles can be. The more you save on premiums. Additionally, an emergency fund can help you avoid making a costly mistake by funding deductibles or emergencies with credit cards.
Finally, don’t wait for a claim to see what your coverage is. Or worse, let the loss be the impetus to get coverage in place. Insurance is meant to be preemptive, with the hope that you never need it. But if you and when you do, your entire wealth management plan isn’t destroyed. Risk management ensures that if the worst happens, you have a bad day or two, not a bad life.