Why Insurance Should Be Part of Your Financial Plan

The types of insurance to include in your financial plan depend on your individual circumstances, goals, and risk tolerance. However, there are several essential types of insurance that you might consider for your plan.

Health insurance covers medical expenses and protects you from the high costs of healthcare, which may help you access necessary medical treatment without facing significant financial burdens.

Incorporating health insurance into your financial plan may offer tax benefits. One way to do this is by contributing to a Health Savings Account (HSA). Including an HSA in your financial plan can be a smart strategy for managing healthcare costs and saving for future medical expenses. While there isn't a specific insurance policy called an "HSA insurance policy," health insurance plans paired with HSAs are quite common. HSAs offer unique tax benefits that make them valuable for both short-term and long-term financial planning. Contributions to an HSA are tax-deductible, meaning you can reduce your taxable income by the amount you contribute. The funds in the account grow tax-free, and withdrawals for qualified medical expense are also tax-free.

FSAs are another type of tax-advantaged savings account for medical expenses offered by some employers. Contributions to an FSA are made with pre-tax dollars, reducing your taxable income. While FSAs have a "use it or lose it" rule, meaning you generally have to spend the funds within the plan year, some plans offer a carryover or grace period option to minimize the risk of forfeiting unused funds.

Lastly, if you itemize deductions on your tax return, you may be able to deduct qualified medical expenses that exceed a certain percentage of your adjusted gross income (AGI). This includes expenses such as doctor visits, prescription medications, dental care, vision care, and long-term care services not covered by insurance.

Life insurance may provide a death benefit to your beneficiaries upon your death. It's particularly important if you have dependents who rely on your income to maintain their standard of living. There are two primary types of life insurance: term life insurance, which provides coverage for a specific period, and permanent life insurance, which offers coverage for your entire life and includes a cash value component.

When it comes to your financial plan, life insurance may play a role in estate planning by providing financial security and liquidity to your beneficiaries after your death. If you death would cause a financial hardship for your dependents, such as a spouse or children, life insurance could provide a tax-free lump sum payment to replace lost income. Additionally, life insurance proceeds can be used to cover estate taxes, which may help your heirs receive their inheritance without having to sell assets to pay taxes. This is particularly important for individuals with large estates that may be subject to federal or state estate taxes.

For business owners, life insurance can fund a buy-sell agreement, ensuring a smooth transition of ownership in the event of your death. The proceeds from the life insurance policy can be used to buy out your share of the business from your heirs, providing financial stability and continuity for the business.

Lastly, life insurance can be used to make a charitable donation upon your death, either by naming a charity as the beneficiary of the policy or by using the proceeds to fund a charitable trust. This allows you to support causes you care about while also potentially receiving tax benefits for charitable giving.

Disability insurance replaces a portion of your income if you become unable to work due to a disability or illness. It helps cover your ongoing expenses and may help you maintain your standard of living even if you're unable to earn a paycheck. Disability insurance can cover both short-term and long-term disabilities, depending on the policy's terms and conditions. Short-term disability insurance typically provides coverage for disabilities lasting a few months to a year, while long-term disability insurance offers coverage for disabilities that last longer than a year or are permanent.

Disability insurance policies are customizable, allowing you to tailor coverage to your specific needs. You can choose the benefit amount, elimination period (the waiting period before benefits begin), and benefit duration based on your individual circumstances and risk tolerance. Working with an insurance agent or financial advisor can help you determine the most appropriate coverage options for your situation.

Property insurance protects your assets, such as your home, car, and personal belongings, against damage or loss from perils like fire, theft, and natural disasters. It helps repair or replace your property and may provide liability coverage if you're found responsible for injuring someone else or damaging their property. Without property insurance, you could face significant financial losses if your property is damaged or destroyed, requiring you to cover repair or replacement costs out of pocket.

Having property insurance in place may help provide financial stability and peace of mind, knowing that you're protected against unforeseen events that could cause significant financial hardship. Whether it's damage to your home from a storm, a burglary, or a liability claim, property insurance may help mitigate the financial risks associated with property ownership.

Liability insurance protects you from financial liability if you're sued for injuring someone else or damaging their property. It may be a crucial component of financial planning for individuals, families, and businesses as it provides protection against financial losses resulting from legal claims or lawsuits alleging negligence, injury, or property damage.

There are various types of liability insurance tailored to specific risks and industries. General liability insurance provides broad coverage for common liability exposures, while professional liability insurance (errors and omissions insurance) protects against claims of professional negligence or misconduct. Directors and officers (D&O) liability insurance protects corporate officers and directors from personal liability for decisions made in their official capacity.

In addition to business liability insurance, individuals and families can benefit from personal liability coverage to protect against legal claims or lawsuits arising from accidents, injuries, or property damage for which they may be held liable. Homeowner's insurance and umbrella insurance policies provide personal liability coverage, supplementing the liability limits of auto, home, or renter's insurance policies.

Long-term care insurance (LTCI) is a type of insurance designed to cover the costs associated with long-term care services, such as nursing home care, assisted living, and in-home care. Without LTCI, you may be forced to spend down your savings or liquidate assets to pay for care, potentially depleting your estate and leaving fewer assets for your heirs.

Long-term care insurance premiums may be tax-deductible if you itemize deductions and meet certain criteria set by the IRS. Additionally, some states offer tax incentives or credits for purchasing LTCI.

LTCI can be integrated into your estate planning strategy to protect your assets and ensure that your wishes are carried out in the event of incapacity or disability. By having insurance coverage in place, you can help preserve your estate for your heirs and minimize the financial impact of long-term care expenses on your estate.

Business insurance helps mitigate the risks associated with owning and operating a business. It protects your company's assets and investments, including property, equipment, inventory, intellectual property, and financial resources. In the event of property damage, theft, or other covered losses, business insurance helps repair or replace damaged assets, minimizing financial losses and ensuring continuity of business operations.

Business interruption insurance provides coverage for lost income and ongoing expenses if your business is unable to operate due to a covered peril, such as a fire, natural disaster, or other catastrophic event. It helps replace lost revenue, pay employee salaries, rent or mortgage payments, utilities, and other fixed costs during the period of business interruption.

Incorporating business insurance into your financial plan may help mitigate risks and protect the financial health and viability of your business. By identifying potential risks and securing appropriate insurance coverage, you could minimize financial losses, protect assets, maintain business continuity, and achieve your long-term business objectives with greater confidence and security.

An investor might consider insurance as part of their financial plan for several important reasons:

• Risk Management: Insurance helps mitigate various risks that could jeopardize financial stability. Life is unpredictable, and unforeseen events such as illness, disability, natural disasters, or death could have significant financial consequences. Insurance provides protection against these risks, allowing you to transfer the financial burden to an insurance company in exchange for premiums.
• Financial Protection: Insurance may provide financial protection for you and your loved ones. It may help ensure that you have the resources to cover expenses related to medical care, property damage, liability claims, disability, or death without depleting your savings or going into debt. This protection helps safeguard your assets and maintain your standard of living during challenging times.
• Long-Term Financial Planning: Insurance could play a crucial role in long-term financial planning by providing stability and security for future goals and objectives. Whether it's saving for retirement, funding your children's education or leaving a legacy for your heirs, insurance can help protect your financial assets and provide a safety net against unexpected events that could derail your plans.
• Estate Planning: Insurance can be an integral part of estate planning, ensuring that your assets are distributed according to your wishes and that your loved ones are provided for after your death. Life insurance in particular can be used to cover estate taxes, pay off debts, equalize inheritance, or provide income for your beneficiaries.

Including insurance in your financial plan is not just about protecting against unforeseen risks -- it's about securing your financial future and providing peace of mind for yourself and your loved ones. By assessing your needs, understanding your options, and selecting the right coverage, you can build a comprehensive insurance strategy that aligns with your goals and priorities.

To learn more about strategies for building a financial plan, you can send a message to one of our advisors here.