Building Financial Security
Accidents happen and we all face risks in our lives. Therefore it is important to have an adequate protection and build a financial safety net in order to prevent eventual heavy financial losses.
This is the main purpose of insurance. Part of any sound financial plan is ensuring that you have enough insurance coverage and that you need all the insurance coverage you have.
This type of insurance policy will replace a portion of your income if you are unable to work due to an accident or illness.
Many people consider disability insurance a luxury. Ask yourself though how many months you could live without income and make the necessary calculations how this will affect your savings. For example, if you have been regularly saving 10% of your monthly income, the lack of income for a 6-month period will cost you 5 years of your savings.
Many employers offer disability insurance coverage via a payroll deduction so check first to see whether you have one and decide if you need more. This coverage may be tax-deductible.
This type of insurance provides financial protection after you are gone to those who you designate. It is needed if you have financial dependents (for example, children).
Life insurance has two types of coverage - group coverage (which is generally cheaper) and individual coverage.
Additionally, there are two types of policies:
- term insurance
This type is generally cheaper but covers you only during the time you are making payments. The term insurance policy applies only in case you pass away within the term of the policy.
- permanent insurance
This type is more expensive but continues until you pass away. It may also come with a savings feature and you can use the accumulated cash reserve while you are alive, including for payment of the premiums in times of financial difficulties.
If you own a car or another vehicle you will need automobile insurance. Generally, auto insurance policies provide the following types of coverage:
- Collision coverage - covers your car's repair expenses when you have caused the accident.
- Comprehensive coverage - covers almost everything that may cause damage to your car (theft, hail, vandalism, etc.)
- Liability coverage - you can count on this coverage if the caused physical injury or property damage is your fault.
- Medical Payments (MedPay) coverage - covers yours and your passengers' medical expenses if somebody gets injured in an accident.
- Personal Injury Protection (PIP) coverage - extends the medical coverage and may cover resulting lost wages.
- Uninsured/Underinsured motorist coverage - covers the expenses when the other driver is not insured.
For additional insurance against incidental expenses in the event of job loss, health problems, etc. it is always a good advice to have an emergency savings fund that can cover your regular expenses for at least six months.
Once you have built your financial security by making sure you have the insurance coverage you need and your assets are protected by your emergency fund, you can proceed to the next step of your financial plan towards achieving your goals.
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- Annuities Explained
- Introduction to Variable Annuity
- Introduction to Private Mortgage Insurance (PMI)
- Building an Emergency Fund
- Introduction to Insurance Scores