Homeowners insurance and life insurance are two pillars of a sound financial plan. Without these protections, families are exposed to potential financial peril, experts say.
The untimely death of a bread-winner can devastate a family unless life insurance is in place to pay for mortgages, college tuition and basic living expenses.
Meanwhile, a fire can decimate or destroy a house, which in most cases is a family's most valuable asset. Most people are required to purchase homeowners insurance as a condition of their mortgage, but policy language and limits vary.
As with any purchase, consumers are best served by looking for cost efficiency. Buying "too much" insurance steals from today, while buying "too little" puts tomorrow at risk.
Here are some tips from insurance and financial-planning experts to help you make good insurance-buying choices.
Life insurance tips
» Many employers offer basic, group life insurance to their employees, but it is often not sufficient. A typical group policy might replace one year of salary in the event of an employee's death. A more reasonable life insurance target is 8-10 times a worker's annual salary, experts say.
» So-called term life insurance is the most common, and economical, type of policy. It returns a specified amount — say $500,000 — for a specified term — say 10 years. Premiums are level for the term of the policy.
How much life insurance is enough?
"The calculations depend on which risk(s) they need to insure," says Jennifer Harper, a fee-based financial planner at Bridge Financial Planning in Chattanooga. "A typical life insurance calculation would include adding liabilities (mortgage, auto, education expense, etc.) and replacing income for a period of time."
Other types of life insurance, such as so-called "permanent life" polices, couple a death benefit with an investment component. These policies tend to be more expensive, but don't have a hard expiration date. Which kind of life insurance is best for you depends on your financial circumstances. A financial planner can help you make the best choice.
» It's important not to delay a life insurance purchase: The younger the customer, the lower the rate.
"The cost of coverage is directly related to the risk involved," says Casey Houston, a State Farm agent based on Signal Mountain. "Older people are likely to die sooner than younger folks. Therefore, at a younger age, it is much easier to qualify, not only for life insurance in general, but also for a higher amount and a lower rate given that younger people are generally healthier. Also, you are more likely to be able to 'lock in' lower rates for a longer period of time (when you are younger)."
» Getting quotes from a variety of companies on life insurance is always a good practice, but it's also important to purchase from a financially sound firm. Again, a good adviser can help steer you to financial sound insurance companies.
» Don't forget other income sources. Survivors often qualify for Social Security benefits, and many professionals have disability insurance in case they become physically unable to work.
"Life insurance may not be the primary or only insurance need," says Harper. "Disability insurance is sometimes overlooked. What if the primary earner is not able to work for a period of time? That can be just as financially devastating, but wouldn't be covered with life insurance."
» New hybrid products are also available for those who want to combine a death benefit with some protection against long-term care costs, like the cost of nursing home care, experts say.
"We see more clients looking to policies that are a hybrid of life and long-term care (LTC) coverage," says Harper. "Health expenses are a big unknown in retirement planning and stand-alone LTC policies have become much more expensive in the last few years. A hybrid policy can offer some LTC coverage, with the additional benefit of having value as a life policy if LTC isn't used."
Homeowners insurance tips
» Experts say it's important to purchase insurance that will pay to rebuild your home if it is destroyed, or your property if it is stolen. Hopefully, your home will appreciate in value over time, so you want an insurance policy that keeps up with the replacement cost. Look for something called an "inflation guarantee."
» Homeowners insurance also protects you against liability in case someone is injured on your property. The limits of that protection can be extended under so-called "umbrella" policies that can stretch to $1 million or more.
"Remember, whether or not someone has a valid claim against you or your property, they can still sue you and put you and your family through the wringer," says Houston. "Having liability coverage guarantees you legal representation and protects your assets from being subject to a judgment up to your coverage amount."
» Deductibles may vary on homeowners policies. Typical these days is a deductible based on .5-to-1-percent of the value of the dwelling.
"This helps keep the premium lower generally than a flat dollar amount deductible," says Houston. "For example, if your home is insured for $250,000 (dwelling) the deductible would calculate out to be $1,250 (at one-half of one percent)."
» If you have personal property that is especially valuable, such as art work or jewelry, you can buy extra protection to cover the full replacement value.
» Basic homeowners policies don't cover floods. If your house is in a flood plain your mortgage will require that you purchase government-backed flood insurance.