We talk to people all the time who say that they are insurance poor and that they have too much insurance.  I completely understand being insurance poor as there are so many critical types of insurance that you should buy for yourself.  My list of insurances grows all the time and now I have life, health, disability, homeowners, flood, car, dental, and vision.   After buying all of those, I feel like I have protected just about every basis possible.

All of these are critically important and some are even required by law to carry.     My goal is too have maximum protection for all of the key areas of risk.  When I say maximum protection, I mean full replacement value of what you are insuring.   For example, if my car is worth $40,000 and I total it, I want full replacement of $40,000 from my insurance company.   If I become disabled and can’t work, I want to make sure I can replace my income as close to its current level as possible.   Not to belabor the point, but if my house burns down, I want full value from the insurance company.

I try to calculate life insurance in the same fashion.  What is my full value to my family?  I want the insurance company to reimburse the full 40k for the car and the full amount to my family.   I doubt my family is going to get a check after I pass away and say, “gee, this is too much”.   I am not suggesting to overinsure, but rather to be consistent and try and protect full value on important assets like yourself.

When looking at your financial life it is important to build an island of protection.   You can never completely insulate yourself from all risk, but you can take certain steps to protect your families future.  You need to have all the basics in insurance with homeowners (if you own a home), car insurance, health insurance, and life insurance.  On top of that there may be various trust work and planning that you can do with your lawyer and CPA that can help to further protect you.

One thing we suggest to our clients is to buy an overall umbrella liability policy.  Usually for a few hundred dollars a year you can get an umbrella policy for several million dollars.   With homeowners, car, and health insurance you want to make sure you have plans that meet your needs and have deductibles at a reasonable level.  For example, if you can swallow a slightly higher deductible, then that can usually drop your premiums.   You have to obviously meet the deductible amount if you have a claim though.  When looking at Life insurance, you want to make sure you protect your income for your family.    Also, if your spouse works  it is probably important to protect their income.    Life insurance isn’t just about straight financial loss as you may not emotionally be able to go on for a while.   Do you have enough insurance if you didn’t want to go back to your job right away or even for two years?

Besides protecting yourself and your family it is important to protect your assets from creditors.   It is important to speak to your CPA, Lawyer, and financial professionals to make sure you have taken the proper steps on this front.   Understanding how to set up your assets and what vehicles to use will be important to determine.

Often times we find that people can move around what they are already spending to maximize their situation.    For example, if you raised your deductible on your car insurance from $500 to $1000, you probably can free up enough money to buy a umbrella liability policy.  You maximize your overall protection, by making this simple move.   Are you okay with upping the deductible, if you could free up enough money to buy a 3 million dollar liability policy?

What if you want to buy life insurance or long term care with no additional out of pocket cost?  One client had $100,000 in a bank CD and was receiving 5% a year and wanted to buy long term care insurance.  I suggested that they take the simple interest from the CD and pay the taxes and buy the long term care policy.  The long term care policy was about $3000 annually, so the interest off of the CD  covered the whole premium.  She didn’t have to touch any of her principal and in essence made a large step to protecting all of her assets in case of a long nursing home stay.  She was concerned about leaving her family the assets she had accumulated and didn’t want to see something like that burn up her whole estate.  With that simple move, she protected against huge downside risk.

It is important to take a look at your model and see where you might be able improve your situation.   It is critical to look at your insurance (homeowners, car, life, etc.) and your investments and try to identify any inefficiencies.   There is a good chance you can see improvements with no additional out of pocket cost to you.