RISK MANAGEMENT
What type of insurance do you really need?

     Insurance is important for those who face large liabilities. Insurance was not designed to cover minor risks such as incidental health cost, small dent on your car or to pay for painting your home, etc. Insurance is intended to prevent financial disaster should some unforeseen event cause a large liability that would bankrupt you. With this in mind we will quickly outline the needs for all types of insurance based upon given circumstances.

     The following is an outline of the types of insurance coverage you should own based on the indicated circumstances:

• Auto insurance: Without savings you will need full coverage as recommended by your casualty agent. With a reasonable emergency savings fund, you can cut the cost of vehicle insurance by increasing deductibles. If your vehicle is old you may consider deleting the comprehensive, etc. Never reduce the liability protection for injured parties. This is a summary only. Seek help from your casualty agent regarding coverage. Don't underinsure your liability. The author's wife and daughter was in an accident caused by an underinsured motorist. Our own insurance company had to pay thousands of dollars from our underinsured policy provision. The danger to carrying minimal auto insurance is that the damaged party's insurance company will sue you for damages.

• Home-owners or personal property insurance: Everyone should protect their home from fire, theft and liability. If you rent, you will want to cover your furniture and personal belongings. If you have a part-time business in your home, your business computer or other business equipment in probably not covered. Discuss the need for a business liability policy to cover your part-time home business property and liability. This insurance is low cost and protects your business assets. If you have an active business in the home you should consider this insurance. Never underinsure the value of your property. A friend of the authors' house burned down January 2003. They woke up with flames all around their bed. They crawled on the floor to safety in their underclothes. As they reached the yard, the entire house collapsed behind them. They lost their dog, cars, and everything they owned in the house. It is not worth the few dollars you will save each year to face such a devastating loss without sufficient insurance.

• Umbrella insurance is a must for everyone: Umbrella liability protection is an insurance policy that "wraps around" your vehicle and homeowners insurance to protect you for up to $1 to $2 million dollars. It is coverage on top of your current insurance to protect you from large liabilities. Young people who drive recklessly should have the protection because their vehicle insurance may not be enough to protect them in the event they cause major injury to others. If you have property, savings and investments, you should purchase umbrella coverage to protect what you own. Anyone driving a vehicle could accidentally kill someone or injure others and get sued for $1 million or more. Your vehicle insurance may not protect you from a large lawsuit. Just ask yourself, "have you ever caused or almost caused a bad accident?" Could you cause an accident in the future? Remember, over 75 percent of all two-vehicle accidents with injury end in a lawsuit today. Lawyers will sue you and not charge the injured party. Lawyer's fees and court awards are paid by your insurance company and then they come after your assets for the balance. A large lawsuit can bankrupt most of us and the cost of this insurance is normally less than $250 per year. Everyone should consider this extra protection.

• Life insurance: Young people need some form of term insurance convertible to permanent insurance with guaranteed insurability to cover final expenses and immediate family financial needs, should they be killed in an accident. Guaranteed insurability and convertible term insurance will allow you to purchase more life insurance now for only a few dollars each year and later it can be converted into permanent insurance as your needs change.

     Term insurance can also be used to cover debt, mortgages and business debt. Term insurance is normally purchased for temporary needs and to pay off debt. Term insurance can also be used to properly protect the spouse and/or children if you can't afford the more expensive permanent life insurance. Cheap term insurance is better then no insurance. This insurance can be used to protect the family during the early working years, cover debt, provide college funding and personal care of a minor child, provide the spouse with survival income in the event the insured dies prematurely for any reason. However, if you can afford it, variable life insurance or variable universal life insurance offers an excellent death and living benefits. Premiums are charged for the low insurance costs during the early years and the remaining premium is invested in a diversified portfolio much like a 401(k) fund. This gives you the opportunity to grow your cash savings early in life to offset the cost of insurance in later years. Never allow an agent to project more than 4%-7% when they show an illustration for variable life insurance. This allows you to compare different variable or universal policies equally regarding the forecast of returns.

• Tax-free loans: For those who are working toward building a retirement, use of a variable life or universal life insurance policy is recommended to provide tax-free loans after you retire. Should the stock market grow as it has historically, you have the opportunity to accumulate tax free dollars that can be borrowed when you retire without having to pay income taxes on the money. Remember, you do not pay taxes on borrowed money. By contrast, if all your retirement funds come from deferred tax dollars in pension funds, 401(k), IRA, TSA, or other deferred funds, you will have an income tax problem after you retire. Combining your need for life insurance with the tax free accumulation potential of variable life insurance, you can grow a tax deferred fund that will allow you to get those extra funds for trips and recreational spending without having to increase your tax costs. Fully fund these policies, don't minimum fund them because they will accumulate very little for your retirement funding. Seek professional help and shop the market before making a decision. There are hundreds of choices available and some are low cost to provide insurance protection and others are designed to build retirement funds. Contact the ICA for a volunteer referral if you want someone to shop the market for a top quality product.

• Home mortgage insurance: Seldom is it wise to purchase a mortgage insurance contract from the mortgage company. These policies are usually high priced. If you own a policy and you are in good health, you may do better by shopping for a lower cost term insurance replacement. Mortgage insurance is designed to decrease slowly during the initial years of the mortgage and benefits decrease on an accelerated basis during the final years of the mortgage. The lowest cost way to protect your mortgage is to shop for level term insurance. There are very low term rates available that will pay off the mortgage in the event of death and usually allows you to purchase greater death benefits with much less premium.

• Travel insurance: When you travel outside your health insurance coverage area, make sure you talk with your health insurance carrier regarding coverage. Do not travel outside your covered area without coverage. A major health problem during a trip can bankrupt you. You may also call Triple A (AAA) automobile club for referrals of companies that carry travel insurance. The ICA referral program can also help you find sources for travel insurance.

• Summary of retiree insurance needs: The insurance protection discussed in this article may apply to retirees but life insurance may be less important. There are special needs for life insurance such as providing estate tax funds or to protect a handicapped child. You may also wish to reposition annuities that you do not expect to use during your lifetime into a single premium life insurance contract to eliminate income taxes for your heirs. Generally speaking, your need for life insurance may decline and your need for long-term care insurance will increase radically. If you have plenty of assets, you may not need life insurance. Ask for more information on this topic.

Your largest change in protection is the need to increase your vehicle protection and your umbrella coverage. Every year retired people call us who have caused an automobile accident. They are frightened to death when they get sued. Here is the problem. As you age your response time, hearing, reflexes, eye site and alertness tends to decline. Sometimes retirees drive when they should not be behind the wheel. Aging increases the risk when driving and any retiree has increased risks of causing an accident. If you kill people or injure others due to your own mistakes, a lawsuit can seek millions of dollars for the plaintiff. Causing an accident in later life can bankrupt you quickly. Increase your vehicle and umbrella insurance as you age to protect your savings, home and assets. It is inexpensive when you consider this major risk to your financial future. Get with a professional insurance agent or retirement planner and review your entire insurance requirements. You may contact the ICA for a volunteer to give you a second opinion before making a final decision.

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