2017 Cash Flow Checklist: Part V
By: Mike Earl
Review insurance coverages
The goal of insurance is to protect you from catastrophic risk. Insurance is not designed to help you build wealth, nor is insurance a catch-all to compensate for poor planning. Ideally, insurance is something that rarely comes into play; that is, you hope not to ever use it.
The Wealth Group is always available to help you review the various insurance coverages in your life. We have seen some clients save thousands of dollars per year in premiums, after we have reviewed policies and provided recommendations. Here is an overview of the things we consider when reviewing clients' coverages.
Property & Casualty Insurance
Review deductibles on home and auto insurance. The higher the deductible, the lower the premium. We like to see auto deductibles of at least $1,000 and home deductibles of at least $5,000. If you keep a large bank balance at all times, consider raising deductibles even further (if you can stomach it).
A general rule of thumb we use for homeowners insurance: the annual premium should be around 0.4% of your home's value. For a $300,000 home, that would equate to $1,200 in annual premiums, or $100 per month. If your premium is higher than 0.4% of the home's value, it's worth reviewing the coverage to make sure you are getting a fair shake.
Make sure you have adequate coverage for "Uninsured/Underinsured Motorist" on your auto policies ($250K/$500K is usually what we see on policies). This coverage protects you in the event of a car crash with someone who is uninsured or underinsured. Recent estimates report that 1 in 8 drivers on the road today are uninsured (source: http://www.iii.org/fact-statistic/uninsured-motorists.
What is the dwelling coverage limit on your home? We have seen some policies with replacement values up to $200,000 higher than the current value of a home. If your home is currently worth $350,000 but your coverage limit is set to $500,000, then you are paying a lot of extra premium each year.
For the great majority of our clients, the end game for life insurance is to get rid of it completely. Once a client has reached Financial Independence, their net worth is high enough that no life insurance is needed on their lives.
Term life insurance is our recommendation in 9 out of 10 situations. Term life insurance is the cheapest coverage. We have access to dozens of different insurance carriers, so we simply find the cheapest premium for a given policy.
If you are paying in premiums to a cash-value life insurance policy, ask yourself this question: could the cash in this policy be put to better use in a diversified investment portfolio? Most cash-value whole life policies pay a dividend of anywhere from 2-4% per year. That's a great return for short-term money, but a lousy return for longer-term money (7+ years).
If a client has a net worth that is far beyond what they will ever need in their lifetimes, life insurance can be used in an estate planning capacity. Essentially, this means transferring some wealth out of your estate (to children or grandchildren)