No one likes to think of tragedies, but everyone should prepare for one. Understanding what resources and liabilities you and your family are exposed to will greatly impact the type of insurance and planning required to mitigate potential loss and risk. The primary purpose of insurance is to protect against risk. Specifically, insurance should mitigate financial loss by meeting financial liabilities and needs in the event of an accident, disability, or death. One of the biggest concerns for parents and spouses is whether their dependents will be provided for if an unexpected event occurs.
Life insurance can offer some solution in the tragic circumstances surrounding a death in that it can help maintain a financial quality of life for a spouse, meet mortgage liabilities, and also fund college accounts. These examples take into account the human life value. This value is based on the individual’s income earning ability; it is the present value of the income lost by dependents as a result of the person’s death.
The other component to life insurance planning is understanding a family’s capital needs. If a spouse is the primary earner, he or she must determine what income is needed to maintain her family’s current quality of life.
An example of this is provided in the following scenario: If John dies, he wants his wife to have yearly income of $60,000 that will increase with inflation at 4% and his wife will be able to realize an after-tax return of 7% on investments. Given these figures, we would determine a capital need of $2,060,000, which may be able to be met with a combination of life insurance and existing investments.
Disability insurance alleviates the financial strain of not being able to engage in one’s own occupation. The best definition of disability is the inability of the insured to engage in his or her own occupation. Often, the more technical or physically demanding a profession, the higher the need for a disability policy. This is why surgeons, attorneys, and carpenters should consider the benefits associated with a disability policy.
Sometimes after a disability, it is difficult for that individual to re-enter the workforce with the same physical abilities prior to the disability. Therefore, it is important to know the exact kind of disability policy to enroll to ensure current income is protected as well as confirming what disabilities are included and verifying how the carrier defines your occupation.
Long-term care, for many, can be very costly and a financial strain on many families if a family member is in need of such care. It can also quickly evaporate savings and retirement accounts when not planned for properly. Furthermore, private medical insurance policies (both group and individual) generally exclude coverage for long-term care, and Medicare long-term care can be too restrictive.
It is for these reasons that long term care insurance should be part of the planning process and examined if appropriate. Typically, the need for long term care is triggered by the inability to perform two or three activities of daily living (ADLs), and cognitive impairment is an automatic trigger.