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Adequate insurance coverage includes:
Homeowners insurance
Make sure your coverage includes full replacement value. This is especially important given high inflation in recent years. In the event of a total loss, it could very likely cost more to rebuild your home than your home’s market value. The cost of building materials and labour have skyrocketed in recent years. If you don’t have full replacement value, in the event of a total loss you may end up having to allocate a substantial amount of your savings/investments to rebuild your home.
Automobile insurance
For most people, the state minimum liability limits are designed to protect other people, not your wealth. They are often as low as $25,000–$50,000 per person, $50,000–$100,000 per accidentfor bodily injury, and $25,000–$50,000 for property damage (varies by state). If damages exceed those limits, your personal assets can be at risk. For someone with meaningful savings, $250,000 (bodily injury per person)/$500,000 (bodily injury per accident)/$100,000 (property damage) plus a $1–3 million umbrella policy (see below) is often an excellent balance of cost and protection.
Personal liability umbrella coverage
This coverage layers on top of your other insurance and provides protection in the form of additional automobile coverage, homeowners liability coverage, and protection from personal liability lawsuits. $1M-$3M is adequate coverage for most situations. Note: personal liability insurance policies are surprisingly inexpensive, and well worth the premiums.
Health insurance
It’s critical you have enough health insurance coverage to cover an extended hospital stay in the event of a serious accident or illness. Check the maximum limit of coverage on your health insurance plan. I recommend a limit of $1M or more. Extended hospital stays can range into the hundreds of thousands of dollars or more. Many people have had their savings devastated (or worse, had to declare bankruptcy) because they have drowned in medical bills.
Disability insurance coverage
Statistics show there is a 40-60% chance that a person will experience a disability during their working career. No one thinks it will happen to them, but the statistics do not lie. What would happen to your savings in the event of an extended disability? You would have no choice but to draw down your nest egg to provide income for yourself. Worse yet, what if you experienced a disability that prevented you from working for the remainder of your working career?
Likely your nest egg would be entirely depleted over a long period of time like that. How would you then fund your retirement? Many disability plans only offer 60% or less income replacement value – if available it’s important to have supplemental disability coverage to increase that percentage of income replacement. If you can, make sure your disability insurance plan has an “own occupation” clause. This type of coverage will replace your income if your disability prevents you from working in your same occupation. Other types of disability coverage will not pay out if your disability allows you to work in a different (likely lower wage) occupation.
Life insurance coverage:
Any breadwinner whose income contributes to the lifestyle you enjoy should have life insurance coverage while still working. Coverage should be enough to replace lost wages for the remainder of each individual’s working years. It’s important to remember that a breadwinner’s income not only contributes to your lifestyle, but also contributes to your retirement savings plan. Both will need to be replaced in the event of an early death. Additionally, if you have minor children and only one spouse works, the amount of life insurance coverage on the non-working spouse should cover the cost of childcare until the children are old enough to care for themselves.
