The purpose of insurance is to help protect us from losses, and maybe even catastrophic losses. That's why planners such as myself recommend it as the foundation of any solid financial plan.
But simply having a policy isn't enough. Getting the wrong kind of coverage or failing to grasp some of the details surrounding that coverage can leave you high and dry when disaster comes. And your life insurance needs shift as you undergo life changes.
Here are five insurance pitfalls to avoid:
Lapping Your Insurance
Yes, I said “lapping,” not “lapsing.” Too often, I see people living with insurance based on decisions they made years or decades ago. Babies, mortgages, job changes and, in some cases, retirement all may have occurred in the intervening years, meaning they’re not adequately covered. Don’t let life’s changes leave your insurance in the dust. Periodically review your coverage — especially after any major life event.
Only Carrying The Minimum
States have minimum liability requirements for auto insurance. Take coverage out at that level, and you’re in good shape with the law. However, that doesn’t mean you have all the protection you need. Consider property damage coverage, for example. Some states mandate as little as $10,000 in coverage. If you’re at fault and damage someone else’s car or property, that coverage is the amount available to meet your obligation. It’s easy to see how that could be wholly inadequate if you happen to hit the wrong car, say a brand-new luxury sports car. Yes, carry the coverage required by the law, but you may not want to stop there. I hate to admit it, but on the eve of a physical fitness test or two I might have joked, “if it wasn’t good enough, it wouldn’t be the minimum.” In this case, that might not be true.
Forgetting About Taxes
Different types of insurance are treated differently for tax purposes. For example, life insurance proceeds are generally tax-free. By whom and how the premiums are paid can also determine tax implications. Disability insurance payments resulting from employer-paid coverage is taxable, but if you pay the premium yourself, those same benefits would be tax-free. It’s easy to forget about taxes, but make sure you don’t when you’re considering the implications on your insurance coverage.
Assuming You Are Covered
Most of us understand that homeowners policies don’t cover flood damage and that you typically must purchase that separate coverage through the federal government’s National Flood Insurance Program. But did you know the property coverage provided by your homeowners coverage may limit coverage for specific items, for example $2,500 on jewelry, despite a large amount of total property coverage? That could limit making you whole in the event of a catastrophe. In that case, you may want to look at a separate endorsement or a separate valuable personal property policy. Renting a car? In the U.S., your auto policy may transfer, with certain exceptions, to your rental vehicle. Outside the country, that’s probably not the case. Don’t assume the best, and you won’t get cold cocked by the unexpected. Read the fine print.
Forgetting About It
Frankly, there are a lot of competing demands for our limited resources. And because it’s not necessarily in your face, like the rent check, car payment, credit card bill and so on, insurance can fall by the wayside. However, if you need it and don’t have it, the loss can be devastating. In the end, it’s a way to protect yourself, the ones you love and your stuff.
Insurance is an important part of your financial plan. Take a little time to keep on top of your policies and ensure that you have the coverage your family needs.
