Insurance. This subject doesn’t get anymore fun the more you talk about it. BUT…IT IS IMPORTANT.
On the road to building your wealth, there are times where you want to pay to protect yourself from unexpected large losses. In the finance industry, many of these are called “hedges.” Hedging is a popular strategy many professional investors use to mitigate downside risk.
So How do we hedge our personal finances?
Well, for starters, we use insurance. Insurance comes in many forms and many of these products are all equal. Some products are not in favor of the consumer. Not one product will protect you in all instances. Some examples of insurance products are: Auto insurance, Home Insurance, Life Insurance, and also Liability (Umbrella policy) insurance.
The point of these types of insurance is to pay out a small premium to a company that is willing to provide you “adequate” coverage for that premium.
Auto Insurance
If you own a car, or lease one, you have heard about getting auto coverage. There are many types within this such as liability only or collision coverage. Generally, if you have a loan on the vehicle, your banker will usually have you provide proof of collision coverage for the vehicle. This is more expensive than liability, however it will cover more in the event of an actual collision.
Do you always need collision? Depends. If you have a really old car in which you have the money to replace if you got in an accident, then you may only need liability. However, you are driving the nicest fanciest thing off the lot, even if you owned it outright, you may still want full coverage on it just in case. If you are in the middle though, there are more factors that play into it.
Home Insurance/Renter’s Policy
If you own a home, typically you want to protect yourself in the event of natural disasters. For most American’s, their home is their single largest investment towards the contribution of their net worth. This being said, having a home policy can provide the cost to rebuild in an unplanned natural disaster.
For renter’s, you may still want to have the protection of your possessions. This is a good policy that you can get to help protect you against the cost in case something happens to the place you live.
Life Insurance
Here is a debate that will not go away. Whole or Term Life…This conversation has turned more philosophical than anything. If you believe in whole life, and you have reasons to have it, and it makes sense to you, just understand it is a VERY expensive policy. If you save and invest your money, you may only need a term policy while you work toward your goals. Eventually, with enough money, why would you still need life insurance?
Many policies now come with riders for children or to turn term policies into whole. Riders are a feature which can turn a policy into a better policy in case your situation changes. For instance, if you had a term policy with a whole life rider. You pay a term premium, and then if something happens and you decide you want whole, you can exercise the rider, pay the additional fees and have your converted policy. Again, get what works for your situation.
Liability Insurance
If you are a high net worth individual. Congratulations. You may need more coverage than any of your existing policies will allow. In that case, an umbrella policy may work for you. Many people that I know that has these types of properties are typically real estate investors, public figures, and business owners. If for any reason there is a claim to go after a person’s personal investments, liability insurance can cover those situations. Anyone can get them; however, they are typically not needed until you are trying to protect a lot of wealth.
Though this is just a few of the different types of insurance, I will try and cover them in more detailed in a later post. If you feel you need a policy, that you don’t have, please contact a licensed insurance agent.
