Are You Underinsured?

By: Joe Daly,
Daly Investment Planning Ltd,
Ballinrobe,
Co Mayo. (094 952-0921 or e-mail: info@dip.ie )

The buy and hold strategy has typically proven successful for many investors, so it might be tempting to apply the same logic to other aspects of planning your financial future. For example, what if you bought and held insurance? No Problem? We would not recommend it as people should review their finances as due to ever-changing circumstances. Insurance isn't something you buy and forget about. In fact, some people are caught underinsured as they fail to regularly reassess the types and amounts of insurance coverage held.

Below are some insurance basics and practical tips that can help you determine if you are adequately insured. Each individual circumstances vary this is why we recommend reviews.

• Why should anyone consider Buying insurance?
• When should a person or business consider buying insurance?
• How much insurance should you have?
• What about life insurance?
• How often should you reassess your insurance?

Q.Why should anyone consider Buying insurance?

A.Insurance is a way to help protect you and your family against unexpected events and their associated expenses. Such expenses could be clearing of loans or leases, providing extra funds to carry a family or business through a troubled period. It's also a way to help provide financial security between now and the time when you've reached your financial goals. These goals should be looked at regularly to see if they can be achieved.

Q. When should a person consider buying insurance?

A. Insurance is a way to help protect you and your family against unexpected events and their associated expenses. Such expenses could be clearing of loans or leases, providing extra funds to carry a family or business through a troubled period. It's also a way to help provide financial security between now and the time when you've reached your financial goals. These goals should be looked at regularly to see if they can be achieved.

Q. How much insurance should a person typically have?

A. The types and amounts of insurance that may be right for you depend on your age, family situation, current and future financial obligations, the value of your assets, business structures and your financial goals. But, generally speaking, you should have enough insurance to adequately cover your financial responsibilities should anything happen to you. And, even though you buy insurance hoping that you'll never have to use it, you should select coverage amounts assuming that you will. With some types of insurance, like property and car insurance, it's easier for you to determinerequired coverage levels, because the value of what you’re insuring is very clear. For other types of insurance—like life, long-term care, serious illness and disability—you may need some assistance determining what is right for you.
There is no simple answer to this. Neither is it complicated once you look at it as part of your financial goals.

Q. What about life insurance? How Much should I have?

A.Determining the appropriate amount of life insurance to buy may seem complicated, but it needn't be. No matter what method you choose, an important question to ask yourself is, “If something were to happen to me, what would happen to the people who depend on me?” These people will be family mainly but also those in your business as many forget that on death beneficiaries have certain legal entitlements and this can effect the future of a business. Here are a number of simple ways to help calculate the amount of coverage that may be right for you.

1. Figure based on a multiple of your income. This method is easiest, but probably the least accurate. As a general rule, your life insurance coverage should be eight to 12 times your annual income.

2. Calculate coverage based on income replacement and investment return. This method involves buying enough cover so that the annual investment return from the life insurance proceeds replaces your income. This is not accurate as certain assumptions will be taken to decide on the figures.

Example: If your family will need to replace an annual income of 50,000, and you think 6 percent is a realistic average annual return on investments, then you would purchase 830,000 worth of coverage (830,000 x 6 percent = 500,000). With this amount of coverage, the annual investment income should cover the family's expenses without spending the principal.

3. You could customize an approach that accounts for your overall financial goals and current assets ( less liabilities). This method is more precise because it takes into account your specific expenses, goals and assets. For this approach you need to talk to a Qualified Financial Advisor.

Q.How often should a person reassess his or her insurance needs?

A.You should take an inventory of your situation and financial responsibilities at least every five years—more often if major changes in your life occur, such as having a child, buying a home/ second proprety, starting a business or changing careers. In fact, being adequately insured depends largely on making sure your insurance coverage accurately reflects what exactly is going on in your life. Just as you evaluate your property , loans or investment portfolio, you should continually update your insurance coverage.

BACK TO NEWS