When you think about financial planning, insurance may not be the first thing that comes to mind. Perhaps it should be, though. Insurance protects your most valued assets, helping assure that what you've saved will be there when you need it. 

Let's take a look at insurance planning, how it fits into financial planning, and how to choose the right coverage.

Insurance Planning: What It Is and Why It Matters

Insurance planning means assessing your financial risk and determining how you're going to cover it, often utilizing insurance or current assets. Your insurance policies should protect yourself, your family, and your assets against unforeseen events.

A healthy wealth management plan may include basic health and liability coverage for catastrophic events, such as a major medical issue or property damage, as well as long-term care, life and disability insurance, which can help prevent future financial catastrophes.

The Role of Insurance in Financial Planning

Insurance can help you protect yourself and your family against unexpected financial losses due to death, disability, or other life events. It can also provide the resources needed for long-term care, giving you peace of mind that your loved ones will be taken care of. 

How does insurance fit into a financial plan?

Your financial plan is predicated on a series of assumptions. First, you assume you'll live to provide a source of income for yourself and your family. Second, you assume that your home and other real estate investments will remain untouched by acts of God. Finally, you assume that your health will remain vibrant into your retirement years.

When any one of these assumptions fails, your whole financial plan could be jeopardized. Insurance provides a buffer against unexpected life events such as disability, injury, illness, fire, flood, or accident.

Types of insurance to include in a comprehensive financial plan

• Life insurance: Life insurance is a financial product that pays out a sum of money to designated beneficiaries upon the death of the insured.

• Disability insurance: Short-term and long-term disability insurance provides financial support to individuals who are unable to work due to an illness or injury. 

• Health insurance: Health insurance helps cover the costs of current medical care and can provide access to preventive care services. 

• Long-term care insurance: Long-term care insurance can meet the cost of rehabilitation services, assisted living, memory care, in-home care, or senior housing. 

• Property and casualty insurance: Property and casualty insurance can help protect a person’s assets in the event of a loss due to theft, fire, flood, or other catastrophic events.

The Risks of Inadequate Insurance Coverage

To many investors, insurance can seem complex, intrusive, or even morbid. After all, who wants to imagine themselves as the victim of a medical or natural disaster? 

Unfortunately, though, not having adequate insurance coverage can lead to serious consequences. Consider the following:

Medical bills: The Commonwealth Fund found that 13% of Americans have no health insurance and another 21% have inadequate coverage. Without proper health insurance, even a small problem like a broken arm can cause financial pain. A major issue such as cancer treatments can devastate your financial life. And since people without health insurance are less likely to see the doctor, they are also more likely to become seriously ill than people with insurance. 

Loss of income: About 51 million Americans do not have disability insurance, yet 25% of today's 20-year-olds can expect to be out of work for a year at some point in their lives due to disability. And don't forget the stay-at-home parents. If they become disabled, your expenses will go up so you might consider including them in your plan if you can. 

Property damage: In 2020, 6% of insured homes made claims for damages. Without the right property insurance coverage, any unexpected damage or destruction to your home or belongings could lead to significant costs that you would be responsible for out-of-pocket. 

How to Choose the Right Insurance Coverage

When choosing insurance coverage, consider the following steps:

• Assess your risks and needs: Start by identifying the risks that you and your family face, and consider the financial impact of those risks. For example, if you have dependents, you may need life insurance to provide for them in the event of your death. If you have a chronic health condition, you may need health insurance with more comprehensive coverage.

• Research the different types of insurance: Once you've identified your risks and needs, research the different types of insurance that are available. Life insurance, for instance, can be term life or whole life, and disability insurance can be short-term or long-term. One survey found that 69% of insurance customers reported using online resources to research and compare insurance policies.

• Determine the coverage amount: When choosing life insurance, consider your income, debts, and expenses to determine the appropriate amount of coverage. 

• Compare policies: In 2023, the average 40-year-old pays $26 a month for a $500,000 term life policy. Anything that ranges far from this standard may warrant a second look — or a hard pass. 

• Review and update your coverage regularly: As your circumstances change, your insurance needs may change as well. 

The Cost of Insurance and How to Save Money

If insurance is critical to your future and your financial health, why don't more people have it? Good question! 

According to a 2021 National Health Interview Survey, 69.6% of uninsured adults say they can't afford health insurance. People who elect not to buy life insurance also name cost barriers along with age (I'm young!) and marital status (I'm single!). And long-term care insurance? A common reason not to buy is the misconception that Medicaid or Medicare provides this service.

In fact, none of these excuses (except possibly cost) is a valid reason not to be properly insured. Let's look at each one in turn.

Medicare does not cover long-term care expenses — at all. You do. Yes, Medicaid will provide funding for a Medicaid-approved nursing home but only after an applicant has exhausted almost all personal financial resources, which can leave them destitute and their families without resources. If you're counting on the family to chip in, remember that family members may not be able to provide the round-the-clock care that some older adults need.

Life insurance rates are the lowest for young people. If you are young, now might be the time to buy. And if you're not married or don't have children? Life insurance can cover a mortgage, student loans, or small business costs that your parents or other relatives might otherwise have to pay. 

Health insurance should be a priority for everyone. If your employer provides a plan, consider buying into it! If you are self-employed, unemployed, or retired early, consider a low-cost "catastrophic" health plan or look into the Affordable Care Act's marketplace (such as Covered California). You could also consider a health share plan, which operates somewhat like a simple insurance plan but offers much cheaper premiums. 

Maintaining good health and healthcare coverage is important even after you retire. While Medicare is likely to meet most of your healthcare needs, a strong supplemental plan and health savings account (HSA) can help you avoid unpleasant surprises. 

Having insurance is not a reason to go into debt. If you’re living paycheck to paycheck, obtaining proper insurance may be a challenge. You likely need to revisit your budget and focus on living within your means before you consider buying an insurance policy. 

Common Insurance Planning Mistakes to Avoid

Insurance planning is an important part of a sound financial plan, and it's essential to get it right to ensure that you and your family are protected from unforeseen events. However, there are several common mistakes that people make when it comes to insurance planning. Here are some of the most common insurance planning mistakes to avoid:

• Underestimating insurance needs: According to Kiplinger, about 90% of Americans underestimate their risk of losing work time due to a disability (it will happen to about ⅓ of current workers). You'll also want to make sure you have enough health, life, and liability insurance to protect your assets.

• Overlooking policy details: Another common insurance planning mistake is overlooking the details of your policies. To avoid this mistake, carefully read your insurance policies, including the coverage limits, deductibles, and exclusions. You should have a basic understanding of what’s covered and what’s not. Ask your insurance agent or financial advisor to explain anything you don't understand. 

• Failing to shop around: Many people stick with the same insurance company for years, even though there may be better options available. While avoiding this mistake takes some additional time and effort, you might consider getting quotes from at least three insurance agencies for your auto and home insurance policies every 1-2 years. 

• Not reviewing policies regularly: Failing to review your policies regularly can result in inadequate coverage or unnecessary expenses. 

• Ignoring insurance as part of overall financial planning: Insurance planning can be integrated with other financial planning activities, such as retirement planning and estate planning. This can help ensure that your insurance coverage is aligned with your overall financial goals.

By avoiding these common insurance planning mistakes, you can ensure that you have the right insurance coverage to protect yourself and your family from unforeseen events.

Working with a Financial Advisor or Insurance Agent

Having adequate insurance coverage is a critical component of a full emergency fund and a healthy wealth management plan. Therefore, it is important to work with an experienced professional who can provide the necessary guidance and advice when making decisions about your insurance needs.

We'd love to help you discover the best way to protect your assets today so you can leave a legacy for the future. We don’t sell insurance, but we know it's an important piece of your financial picture. Contact Cooke Wealth Management for an appointment today.