Tanya Steinhofer No Comments

Protecting their family is one of the top priorities of most parents, particularly if the family is dependent on the income of only one parent.  Much attention is placed on sexier topics like investments, but the best-laid investment strategy can be ruined if something awful happens and the family isn’t protected.

The most effective way to manage financial risk is through insurance.

The most important types of insurance to have are health, life (if you have dependents), disability, auto, homeowners (or renters) and umbrella insurance.  The latter three are called property & casualty insurance.

Property & Casualty

Most people with at least some savings can afford to pay for small accidents that might happen (e.g., a broken car window, a stolen laptop) and insurance companies don’t like processing small claims, so charge more for low deductibles. Therefore, it’s best to set your deductibles on your insurance policies as high as you can afford to reduce the premiums.

On the other hand, few people can financially survive a catastrophic event, so it’s best to set high limits of liability to protect your family from financial ruin. Do not set your auto limits equal to the state mandated minimums as these are too low, especially in the land of luxury cars that is the Bay Area. Make sure you have ample uninsured motorist coverage.

One type of insurance that I highly recommend because it is cheap and you can get lots of it is umbrella liability insurance. It is sold in increments of $1M and sits on top of your auto and homeowners insurance to protect against really bad events. You can get $1M of coverage for a few hundred dollars per year.

Life, Health & Disability

Health insurance is the most important form of insurance and you should always have it. If you are healthy and have emergency savings, you can choose a policy with high deductibles to bring down your monthly cost. You might also be able to contribute to a Health Savings Account with pre-tax dollars to pay for out-of-pocket expenses.

Disability insurance is probably the second most important form of insurance because it protects you if you are unable to work for a period of time.  You are far more likely to be disabled at some point during your working career than you are to die early.  It is often offered as an employee benefit, but if it is not, you can get an individual policy. If you pay the premium, the benefit is tax-free.

Life insurance is important if you have a family that depends on your income. How much you need is a complicated topic. The best way to get a reasonable answer is to do a capital needs analysis that calculates the difference between your assets and the present value of annual cash-flow deficits if you die.  Unless you anticipate having a taxable estate (over $10M for a couple) or have other reasons for needing lifetime coverage, term insurance is usually adequate and least expensive. A good starting amount is $1M of 20-year term if you have a good income and children.

You’ll sleep better at night if you have a comprehensive risk management strategy in place. Then, you can focus on the more interesting topics like investing or how you are going to pay for college.