For this installment, lets agree that insurance is a need. With that in mind, I put insurance in five catagories: Property and Casualty (P&C), Health, Life, Disability, Long Term Care. The question is, "what do all of these have in common"? The answer is, "risk management". In an earlier blog, I talked about limiting exposure as it pertained to health insurance. The truth is that when managing risk, limiting exposure is the name of the game, and each of these products addresses that in their own way.
Property and Casualty
This is not my speciality, but I'll tell you what I know. P&C is an all incompassing field. This covers your house, car, business, and anything else that you own. This is the only "head of the monster" that covers your "stuff". In the process of covering your "stuff", it provides indirect asset protection. Whether you have assets or not, having your "stuff" insured will help you to replace it in the event of catastrophy. There are also personal coverages built into P&C coverages. For instance, if an injury occurs in a house or business, it is often possible to make a claim against the home or business insurance for the medical expenses incurred from said event. If you get into a car accident, there are protections built in to cover the medical necessities of the injured as well. Over the years (and many law suits), the Property and Casualty coverages have gotten pretty comprehensive. As with any insurance, more coverage = more cost.
Health Insurance
This is the insurance that most people know they should have. The truth is, if you get sick and go to the hospital, you will get fixed. You will leave the hospital with a bill, and you can pay it at your leisure (not exactly, but there are restrictions on how hospitals collect money). The idea behind health insurance is to protect you from major medical bills. It is not for regular check ups, or generic prescription drugs. Many people have gotten spoiled with their group plans at their jobs. These plans generally have a low deductable, and they cover almost everything. The reality is that health insurance wasn't designed to cover everything that could go wrong with you.
As the definition of health insurance changes, expectations of coverages vs. costs must change too. The future of health insurance in America will be high deductables combined with supplemental cash benefits. This combination will allow consumers to keep costs down, and give them the coverage that they need in case of calamity. We will also see growth in the defined benefit plans. The market will design plans that are advantageous to the consumer if it is allowed to.
Life Insurance
Life Insurance is the only policy that is guaranteed to pay out. The downside is, you have to die to get it. This insurance has many purposes. Young people have it to provide for their family in case they die unexpectedly. Older people have it to leave something to their family when they die. In both cases, it can be used to cover debts and final expenses. There are many ways to structure a life insurance policy. Some people prefer term insurance, and some prefer permanent insurance. Each of them are valuable, and can be used together very effectively. With the tax structure ever changing (higher taxes), the life policy is one of the last places to get tax free growth. It is the only place (that I know of) that you get tax free growth and can remove the money (for any reason) and not pay taxes on it. Life insurance products are becoming more popular by the day. There are many types of permanant life products (whole, indexed, variable indexed, universal indexed). Most of them allow the client to take advantage of the growth in the market without any risk of losing their money. Wealthy people have been growing their money in life products for years, but this is available to anyone. With the combination of asset protection and immediate estate formation, having life insurance should be a no brainer.
Disability Insurance
Another way to say this is, "income insurance". We protect our home, car, health, and wealth. Why wouldn't we protect our income. There are many misnomers about disability insurance. The first is that you must be disabled to make a claim. The main criteria for making a claim is for a doctor to certify that you cannot do your job. Once that is determined, you can make a disabilty claim. It doesn't mean that you can't earn money, it just means that the injury restricts you from completing your daily tasks (and others like it). The second myth is that disability is prohibitively expensive. There are a myriad of factors in determining the premium: type of profession, income, current health, duration of benefit, and many others. When you look at the benefit vs. the premium, it typically doesn't seem very expensive at all. The main function of disability insurance is income protection.
Long Term Care Insurance
Over 50% of Americans will use some sort of long term care in their lifetime. The percentages increase with age. Most people think of this insurance being used for nursing homes, and in home care for the elderly. These are two of the reasons people utilize long term care insurance, but it goes much further than that. If you have a long term care policy in place, you can make a claim on it if you lose just two activities of daily living (ie: eating, bathing, dressing, toileting, transferring (walking) and continence), regardless of age. It is easy to see how the loss of a couple of these abilities could occur (accident, sickness,.....). LTC insurance offer a great value to the policy holder, and if it is started early, the value is much more robust. LTC policies give the client a pool of money that is available from the first day that the policy is in force. They can be designed to grow at an agreed upon percentage (2-5% usually). Over time the original pool can get much larger, and is at the clients' disposal (once a claim is made) until the pool of money is exhausted. Skilled nursing care is not cheap, so a larger pool of money is desired. The main function of LTC insurance is asset protection.
If you put all five of these products together, it is easy to see how each pillar has a place and function. If you don't have each one of these in place, make a plan to do so. We don't all have enough money to have complete protection today, but with a solid plan in place it can be done.
Opinions, thoughts and comments are always appreciated.
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