Series · Lesson 11

Insurance: What Protects Our Family and Why?

Insurance is not primarily an investment. It is a way to transfer financial risk that could otherwise seriously disrupt a family’s financial plan.

A strong family financial plan is not just about building wealth. It is also about protecting the wealth, income, and lifestyle the family has worked to create.

The goal is not to have the most insurance. The goal is to understand which risks could financially damage the family and how those risks are being addressed.

This is Lesson 11 of the Family Financial Continuity Education Series. See also Lesson 10: Social Security.

1. Know What Risks the Family Is Insuring

A family may have several types of insurance:

The family should understand what each policy protects and what could happen without it.

2. Create an Insurance Inventory

For every significant policy, document:

• Insurance company
• Policy type
• Policy owner
• Insured person or property
• Policy number
• Coverage amount
• Premium
• Deductible and major limits
• Term or renewal date
• Beneficiary, where applicable
• Agent or adviser
• Claims contact
• Where the policy documents are stored

The inventory should answer a simple question: If something happens tomorrow, could another family member quickly determine what insurance exists and how to use it?

See Lesson 12: The Family Insurance Inventory.

3. Understand the Purpose of Life Insurance

Life insurance should be evaluated based on the financial consequences of death—not simply on a multiple of income.

Potential needs include replacing income, paying off debt, funding children’s education, supporting a surviving spouse, providing estate liquidity, funding business succession, equalizing inheritances, supporting charitable goals, and creating a legacy.

The appropriate amount can change dramatically over time. A young family with substantial future income needs may have a very different insurance requirement from an empty-nest household approaching retirement.

Term and permanent insurance also serve different purposes. Permanent policies may have cash value or long-term estate-planning applications, but they should not be confused with ordinary investment accounts.

Related reading: The Smarter Way to Buy Term Life Insurance, How to Structure Ownership and Control of a Family Life Insurance Policy, and A Gift That Can Span Generations.

4. Protect the Family’s Ability to Earn

For working families, future income may be one of their largest assets.

Disability insurance protects against the possibility that a person survives an accident or illness but cannot continue earning income.

Understand short-term versus long-term disability, benefit amount, waiting period, definition of disability, benefit duration, employer coverage, individual coverage, and tax treatment of benefits.

A family can have substantial investments and still have a major financial vulnerability if its future earning power is not protected.

5. Understand Property and Liability Protection

Insurance should protect more than the physical value of a house or car.

Review dwelling coverage, personal property, replacement cost versus actual cash value, deductibles, liability limits, medical payments, additional living expenses, auto liability, uninsured/underinsured motorist coverage, and exclusions and special limitations.

For families with significant assets, liability protection deserves particular attention. An umbrella policy can provide an additional layer of protection above homeowners and auto liability coverage.

6. Plan for Long-Term Care Risk

Long-term care can create a significant financial exposure because extended care may not be fully covered by traditional health insurance or Medicare.

Families may address this risk through some combination of self-funding, long-term care insurance, hybrid life/long-term-care policies, family resources, and estate and asset-planning strategies.

There is no universal answer. The important point is to make the decision deliberately rather than discovering the family’s strategy during a crisis.

Related reading: A Different Approach to Long-Term Care for Wealthy Individuals and Medicare: Understanding the Basics.

7. Understand Ownership and Beneficiaries

Insurance planning connects directly to estate planning.

For applicable policies, understand who owns the policy, who is insured, who receives the proceeds, who controls the policy, what happens if the owner becomes incapacitated, what happens when the insured dies, whether beneficiaries are current, and whether ownership or beneficiary changes are needed as circumstances change.

A policy can have the right coverage amount but still create problems if ownership and beneficiary arrangements do not match the family’s estate plan.

Related reading: A Modern Family Will.

8. Look for Gaps—and Unnecessary Overlap

Insurance reviews should ask two questions: What are we missing? And what are we paying for that we no longer need?

Common problems include life insurance purchased for an old financial situation, employer coverage assumed to be sufficient, outdated beneficiaries, insufficient liability limits, property values that have changed, duplicate coverage, policies that no longer match the family’s goals, and important risks that were never insured.

Insurance should evolve as the family’s financial life evolves.

9. Insurance Changes With Life Stage

A policy that was essential ten years ago may no longer be necessary. Conversely, increasing wealth can create new liability, estate, business, or legacy risks.

Insurance should therefore be reviewed whenever there is a major change in income, marriage or divorce, children, home ownership, business ownership, debt, retirement, significant wealth, health or caregiving responsibilities, or estate-planning objectives.

10. Make Insurance Part of Family Continuity

The primary financial manager should not be the only person who knows the family’s insurance structure.

Another family member should be able to answer:

1. What life insurance do we have?
2. Who owns each policy?
3. Who are the beneficiaries?
4. What protects our income?
5. What health coverage do we have?
6. What protects our home and vehicles?
7. Do we have umbrella liability coverage?
8. How are we addressing long-term care risk?
9. Where are the policy documents?
10. Who should be contacted if we need to file a claim?

That is the difference between having insurance and having an insurance plan the family can actually use.

Related reading: Financial Continuity.

The Family Insurance Principle

Insurance should be viewed as part of the family’s overall financial architecture:

The objective is not to eliminate every possible risk. It is to identify the risks that could materially damage the family’s financial future and decide consciously which ones to insure, which ones to retain, and which ones to reduce through other strategies.

Know the risk. Know the coverage. Know the gaps. Know what happens next.

Previous: Lesson 10: Social Security: What the Family Should Know. Continue with Lesson 12: The Family Insurance Inventory.