How Does Insurance Fit Into Your Financial Plan?

Is insurance part of your financial planning? If it's not, your financial plan isn't complete. How does insurance factor into financial planning? And should you adjust — or even get rid of — your insurance as you gain more financial freedom? Here are the answers to your questions. 



How Does Insurance Boost Financial Planning?

The right insurance policies help your overall finances in two primary ways. The first is to reduce the risk of catastrophic loss. With good insurance, a natural disaster — such as a flood, fire, or tornado — may be a manageable loss and only require a short recovery. Without good insurance, you may never recover. In essence, insurance is a smaller long-term expense to prevent a sudden crisis expense. 

Other insurance seeks to mitigate more routine costs. These insurance policies don't have as great an individual impact, but they're more likely to kick in more often. For instance, health insurance may help with monthly budgeting for ongoing healthcare costs rather than being saved solely for a huge expense. Knowing what you'll pay on a monthly and annual basis helps smooth out the financial peaks and valleys. 

So, while most people think of financial planning in terms of building savings and setting financial goals, insuring against loss is a key role. It's usually not as exciting or motivating, but it may be even more important than building wealth directly. As you better protect your nest egg, you also protect your future for many years to come.

What Insurance Do You Need?

Most Americans need a mix of insurance coverage types to provide the safety net they deserve. The most fundamental kinds of insurance are common to just about every person. These protect your home, yourself, and your ability to earn income. 

One of the most ubiquitous policies is homeowners or renters insurance. These may or may not be mandatory, and they cover your living space in case of disaster. No matter what your living situation — even if renting a room or sharing a dorm — you need this kind of coverage for your personal belongings. Similarly, anyone who owns a vehicle or otherwise drives should have auto insurance. 

Health insurance should be on the top of every American's financial planning list as well. Why? Healthcare spending is a major expense for the ordinary American and a prime reason for debt loads. Some estimate that Americans carry between $88 billion and $195 billion in medical-related debt. It's also often cited as a cause of bankruptcy filings. This level of expense and debt can ruin your finances for many years. 

In addition to common insurance policies, your insurance needs are customized to your lifestyle and challenges. If you work in a higher-risk industry, for example, you might add accident or disability coverage along with standard medical coverage. Someone who is the sole provider for their minor children should usually have life insurance. And if your family tends to live longer, you may need more long-term care insurance. 

And of course, anyone engaging in any entrepreneurial endeavor needs to have the right business insurance. Even side gigs like delivering pizza or selling your home crafts require business insurance. This is because home and personal insurance usually exclude activities that you participate in for profit. So if your homemade honey makes a customer sick, they could end up suing you directly for serious damages. 

Should You Self-Insure?

As your portfolio grows, you may be tempted to reduce insurance and instead take on more risk yourself. This is often known as self-insuring. Rather than pay premiums for outside protection, the self-insurer builds their own safety net. 

Some level of self-insurance can be helpful to your financial plan. For instance, as your vehicles age and are worth less, you might reduce insurance coverage and take on the risk that you will need to pay more to replace them. This is doable for those in good financial condition if they use the savings to prepare for replacement costs. However, the lynchpin of this system is using that money to build the needed buffer. 

However, self-insuring isn't a smart choice for everything. In general, the bigger the risk factors or potential loss, the less you should rely on self-insuring. These usually include big-ticket items like real estate, your healthcare, long-term care, and life insurance for high earners. These are not areas where most people should gamble that they can cover losses — because getting it wrong is catastrophic. 

Where Can You Start?

Not sure how well you're insured? Not sure if your insurance levels are appropriate for your finances and future financial plans? Start by meeting with the experienced insurance coverage team at Illinois Insurance Center. We'll work with you to find out how the right insurance will help you reach all your financial goals. Reach out to us today to get started.