Tag: insurance

Property and Casualty Insurance

Property and Casualty Insurance

Protection against loss is critical for everything you do, including running your own business or earning money from a side hustle.  The primary tool for mitigating business risks is property-casualty insurance.  There are many insurance policies within the realm of property-casualty insurance, each with its 

How to Buy Life Insurance

How to Buy Life Insurance

Choosing the right type of life insurance policy and its death benefitThe amount of money a life insurer pays you if you die during the policy term. More can be confusing. Not too long ago, I published a guest post from Baruch Silverman of The 

A Man is Not a (Sound Financial) Plan

A Man is Not a (Sound Financial) Plan

“A Man is Not a Plan!” It sounds like a very dated statement, but a guide on a recent trip I took told me about a conversation he had with one of his nieces about her finances.  They were talking about how she could improve her financial situation by building a sound financial plan. As they were talking, one of them came up with the slogan, “A Man is Not a Plan.” He suggested I use it as the title for one of my posts. So, here it is!

In this post, I will talk about the key components of a sound financial plan. A financial plan provides the structure to help you organize your financial information and decisions. I’ll provide brief explanations of the things to consider about each component, what you need to do and, for most of them, links to posts I’ve written that provide much more detail. I’ll also provide insights on how to know when you need help and who to contact.

Sound Financial Plan

A sound financial plan includes the following sections:

  • A list of your financial goals – In this section, you’ll want to identify your three to five most important financial goals.
  • A list of your current assets and liabilities (debts)
  • Your budget
  • Your savings and investment strategies to help you attain your goals, including
    • Short-term savings
    • Designated savings
    • Retirement savings
  • Desired use of debt, including re-payment of current debt
  • Your giving goals
  • Risk management strategy, i.e., types and amounts of insurance to buy
  • Understanding of your income tax situation
  • What you want to have happen to you and your assets when you become incapacitated or die and related documents

You will likely be most successful if you create a formal document with all of these components of a sound financial plan, such as by using Financial IQ by Susie Q’s Personal Financial Planner. You’ll want to review and update your financial plan at least every few years, but certainly any time you have a significant change in your finances (e.g., a significant change in wages) or are considering a significant financial decision (e.g., buying a house, getting married or having children). Of course, a less formal format is much better than no plan at all, so you should tailor your efforts to what will best help you attain your financial goals.

Budget

A budget itemizes all of your sources of income and all of your expenses, including money you set aside for different types of savings. It provides the framework for all of your financial decisions. Do you need to change the balance between income and expenses to meet your goals? Can you make a big expenditure? How and what types of insurance can you afford? How much debt can you afford to re-pay?

I think that a budget is the most important component of a sound financial plan and should be the first step you take. Everyone should have a good understanding of the amounts of their income and expenses to inform the rest of their financial decisions.  While some people will benefit from going through the full process of creating a budget and monitoring it, others can be a bit less detailed.

In the text section of your financial plan, you’ll want to include a list of your financial goals as they relate to your budget and how you plan to implement them. You can include your actual budget in your financial plan itself or as a separate attachment.

Savings

I generally think of savings in three categories (four if you include setting aside money for your kids): emergency savings, designated savings and retirement savings. You will want to address each of these types of savings in your financial plan. The information you’ll want to include for each type of savings is:

  • How much you currently have saved.
  • The target amounts you’d like to have saved.
  • Your plan for meeting your targets.
  • For what you’ll use it.
  • How fast you’ll replenish it if you use it.
  • How much you need to include in your budget to meet your targets.
  • Your investing strategy.
  • A list of all financial accounts with location of securely stored access information.

Emergency Savings

Emergency savings is money you set aside for unexpected events. These events can include increased expenses such as the need to travel to visit an ailing relative or attend a funeral or a major repair to your residence. They also include unexpected decreases in income, such as the reduced hours, leaves of absence or lay-offs related to the coronavirus.

The general rule of thumb is that a target amount for emergency savings is three to six months of expenses. I suggest keeping one month of expenses readily available in a checking or savings account that you can access immediately and the rest is an account you can access in a day or two, such as a money market account.

Designated Savings

Designated savings is money you set aside for planned large expenses or bills you don’t pay every month. Examples might include your car insurance if you pay it annually or semi-annually or money you save for a replacement for your car you are going to buy in a few years.

To estimate how much you need to set aside for your designated savings each month, you’ll want to look at all costs that you don’t pay every month and figure out how often you pay them. You’ll want to set aside enough money each month to cover those bills when they come due. For example, if your car insurance bill is $1,200 every six months, you’ll want to put $200 in your designated savings in each month in which your insurance bill isn’t paid. You’ll then take $1,000 our of your designated savings and add $200 in each month it is due to pay the bill.

Retirement Savings

Saving for retirement is one of the largest expenses you’ll have during your working lifetime. There are many aspects of saving for retirement:

  • Understanding how much you will receive in retirement from government programs, such as Social Security in the US or the Canadian Pension Plan in Canada.
  • Setting your retirement savings goal.
  • Estimating how much you need to save each year to meet your retirement savings goal.
  • Deciding what are the best types of accounts in which to put your retirement savings – taxable, Roth (TFSA in Canada) or Traditional (RRSP in Canada).
  • Determining in what assets (bonds, stocks, mutual funds or ETFs, for example) to invest your retirement savings in light of your risk tolerance and diversification needs and how those choices affect your investment returns.

Debt

Debt can be used for any number of purchases, ranging from smaller items bought on credit cards to large items purchased with a loan, such as a home. Whether you have debt outstanding today, use credit cards regularly and/or are thinking of making a large purchase using debt, you’ll want to define your goals with respect to the use of debt.

For example, do you want to never have any debt outstanding (i.e., never buy anything for which you can’t pay cash and pay your credit card bills in full every month)? Are you willing to take out a mortgage as long as you understand the terms and can afford the payments? Do you have a combination of a high enough income and small enough savings that you are willing to use debt to make large purchases other than your home? Do you have debts you want to pay off in a certain period of time?

As you think about these questions, you’ll want to consider what debt is good for you and what debt might be problematic.  A sound financial plan includes a list of your debts, how much you owe for each one, your target for repaying them, and your strategy for using debt in the future.

Credit Cards

Credit cards are the most common form of debt. Your financial plan might include the number of credit cards you want to have and your goals for paying your credit card bills. As part of these goals, you might need to add a goal about spending, such as not buying anything you can’t afford to pay off in a certain period of time.

Student Loans

Many people have student loans with outstanding balances. In your financial plan, you’ll want to include your goal for paying off any student loans you have. Do you want to pay them off according to the original schedule? Are you behind on payments and have a goal for getting caught up? Do you want to pay off your student loans early?

Car Loans

In a perfect world, your car would last long enough that you could buy its replacement out of your designated savings. However, the world isn’t perfect and you may need to consider whether to take out a loan or lease a car. Your financial plan will include your strategy for ensuring that you always have a vehicle to drive. How often do you want to replace your car? What is your goal with respect to saving for the car, loans or leases? How much will it cost to maintain and repair your car?   Your budget will include the amounts needed to cover the up-front portion of the cost of a replacement car, any loan or lease payments and amounts to put in designated savings for maintenance and repairs.

Mortgages

Most homeowners borrow money to help pay for it As part of creating your financial plan, you might include your goal for home ownership. Are you happy as a renter for the foreseeable future or would you like to buy a house?

If you want to buy a house either for the first time or a replacement for one you own, you then need to figure out how to pay for the house. How much can you save for a down payment? Can you set aside enough in designated savings each month to reach that goal? What is the price of a house that you can afford, after considering property taxes, insurance, repairs and maintenance?

Once you have a mortgage, you’ll want to select a goal for paying it off. When a mortgage has a low enough interest rate, you might make the payments according to the loan agreement and no more. If it has a higher interest rate or you foresee that your ability to make mortgage payments might change before it is fully re-paid, you might want to make extra payments if you have money in your budget.

Paying Off Debt

If you have debt, you’ll want to include your goals and your strategy for paying it off in your financial plan. You’ll first want to figure out how much you can afford each month to use for paying off your debts. You can then compare that amount with the amount needed to meet your goals. If the former is less than the latter, you’ll need to either generate more income, reduce other expenses, put less money in savings or be willing to live with less aggressive goals. These decisions are challenging ones and are a combination of cost/benefit analyses and personal preference.

Giving Goals

Many people want to give to their community either by volunteering their time or donating money.  If you plan to give money or assets, you’ll first want to make sure that you can afford the donations by checking your budget and other financial goals.  It is also important to make sure that your donations are getting used in the way you intended, as not all charities are the same.  A Dime Saved provides many more insights about giving in her Guide to Giving to Charity.

Insurance

Protecting your assets through insurance is an important part of a sound financial plan. The most common types of insurance for individuals cover your vehicles, residence, personal liability, health and life. There are other types of insurance, such as disability, dental, vision, and accidental death & dismemberment, that are most often purchased through your employer but can also be purchased individually.

As I told my kids, my recommendation is that you buy the highest limits on your insurance that you can afford and don’t buy insurance for things you can afford to lose. For example, if you can afford to pay up to $5,000 every time your home is damaged, you might select a $5,000 deductible on your homeowners policy. Alternately, if you can afford to replace your car if it is destroyed in an accident, you might not buy collision coverage at all. Otherwise, you might set lower deductibles as your goal.

For each asset in your financial plan, including your life and health which can be considered future sources of income or services, you’ll want to select a strategy for managing the risks of damage to those assets or of liability as a result of having those assets.

A financial plan includes a list of the types of policies you purchase, the specifics of the coverage provided and insurer, changes you’d like to make to your coverage and your strategy for insurance in the future. You’ll also want to attach copies of either just the declaration pages or your entire policies to your financial plan.

Car Insurance

Car insurance can provide coverage for damage to your car, to other vehicles involved in an accident you cause and injuries to anyone involved in an accident. The types of coverages available depend on the jurisdiction in which you live, as some jurisdictions rely on no-fault for determining who has to pay while others rely solely on tort liability.

Homeowners Insurance

Homeowners insurance (including renters or condo-owners insurance) provides coverage for damage to your residence (if you own it), damage to your belongings and many injuries to people visiting your residence.

Umbrella Insurance

One way to increase the limits of liability on your car and homeowners insurance is an umbrella insurance policy. An umbrella also provides protection against several other sources of personal liability. If you have money in your budget for additional insurance, you might consider purchasing an umbrella policy.

Health Insurance

Health insurance is likely to be one of your most expensive purchases, unless your employer pays a significant portion of the cost. Whether you are buying in the open market or through your employer, you are likely to have choices of health insurance plan. Selecting the health insurance plan that best meets your budget and goals can be challenging.

Life Insurance

There are many types of life insurance, including term and whole life. Some variations of whole life insurance provide you with options for investing in addition to the death benefit. Once you have compiled the other components of your financial plan, you’ll be better able to assess your need for life insurance. If you have no dependents and no debt, you might not need any. At the other extreme, if you have a lot of debt and one or more dependents, you might want to buy as much coverage as you can afford to ease their financial burden if you die. To learn more specifics about buying life insurance, you might review this post.

Annuities

An annuity is a contract under which you pay a fixed amount (either as a lump sum or in installments) in exchange for a future stream of payments.  Some annuities provide income from the designated start date until you die.  These annuities protect against longevity Risk, i.e., the Risk that you will outlive your savings.  This post contains more information about annuities.

Income Taxes

Some of your financial decisions will depend on your income tax situation.

  • Do you want your investments to produce a lot of cash income which can increase your current income taxes or focus on appreciation which will usually defer your taxes until a later date?
  • Is a Roth (TFSA) or Traditional (RRSP) plan a better choice for your retirement savings?
  • Are you having too little or too much income taxes withheld from your paycheck?
  • Do you need to pay estimated income taxes?
  • How will buying a house, getting married or having children affect your income taxes?
  • Will moving to another state increase or reduce your income taxes?

As you consider these and other questions, you’ll want to outline at least a basic understanding of how Federal and local income taxes impact your different sources of income as part of creating a sound financial plan.

Legal Documents

Although it is hard to imagine when you are young, at some point in your life you may become incapacitated and will eventually die. There are a number of documents that you can use to ensure that your medical care and assets are managed according to your wishes. You can either include these documents as part of your financial plan or create a list of the documents, the date of the most recent version of each one and where they are located.

Powers of Attorney

There are two important types of powers of attorney – medical and financial.

A medical power of attorney appoints someone to be responsible for making your medical decisions if you are physically or mentally incapable of doing so. You can supplement a medical power of attorney with a medical directive that is presented to medical personnel before major surgery or by the person appointed to make medical decisions that dictates specifically what is to happen in certain situations.A financial power of attorney appoints someone to be responsible for your finances if you are physically or mentally incapacitated. The financial power of attorney can allow that person to do only a limited number of things, such as pay your bills, or can allow that person to do anything related to your finances.

Trusts

There are several forms of trusts that can be used to hold some or all of your assets to make the transition to your beneficiaries easier when you die. Trusts can also be used to hold money for your children either before or after you die. While I am familiar with some types of trusts, I don’t know enough to provide any guidance about them. If you are interested in them, I suggest you research them on line and/or contact a lawyer with expertise in trusts.

Your Will

If you die without a will, your state or provincial government will decide how your assets will be divided. In many jurisdictions, your spouse, if you have one, will get some or all of your assets. Your children or parents may also get some of your assets. Most people want more control over the disposition of their assets than is provided by the government.

A will is the legal document that allows you to make those specifications. Your will can also identify who will become legally responsible for your minor children or any adult children who are unable to take care of themselves. That responsibility can be split between responsibility for raising your children and responsibility for overseeing any money you leave either to their guardian(s) or for them.

How to Know When You Need Help

As you can see, there are a lot of components to a sound financial plan and many of them are interrelated. There are many resources available to help you develop and refine your plan. Many of those resources are free, such as the links to the articles I’ve published on relevant topics. There are also many other sources of information, including personal stories, on line.

You can also get more personalized assistance. There are many types of financial advisors, a topic I’ll cover in a post soon. Many financial advisors provide a broad array of services, while others specialize in one or two aspects of your financial plan.

Sources of Advice for a Sound Financial Plan

The table below lists the types of obstacles you might be facing and the types of advisors that might be able to help you create a sound financial plan.

ObstaclePossible Advisors
I can’t figure out how to make a budget or how to set aside money for emergency or designated savings.Bookkeeper, accountant, financial planner
I can’t make my budget balance.Bookkeeper, accountant, financial planner
I have more debt that I can re-pay.Financial planner, debt counselor, debt consolidator
I don’t know what insurance I should buy.Financial planner, insurance agent or, for employer-sponsored health insurance, your employer’s human resource department
I’m not sure I’m saving enough for retirement.Financial planner
I have questions about how to invest my savings, including whether I am diversified or need to re-balance my portfolio.Financial planner or stock broker
I don’t understand how income taxes work.Accountant
I need help with a Trust, Power of Attorney or Will.Wills & estates lawyer

Clearly, a financial planner can help with many of these questions, but sometimes you’ll need an advisor with more in depth expertise on one aspect of your financial plan.

The Different Types of Life Insurance

The Different Types of Life Insurance

The life insurance landscape is confusing, to put it lightly. One can get lost in the different types of policies and terminologies, such as whole lifeA type of life insurance that pays the death benefit regardless of when you die, as long as you pay 

Top Ten Posts in Our First Year

Top Ten Posts in Our First Year

Financial IQ by Susie Q celebrated its first birthday last week. In the first year, we published 52 posts on our site, two of which were guest posts from other authors, and published two posts on other blogs. In case you haven’t had time to 

6 Tips About Homeowners Insurance

6 Tips About Homeowners Insurance

Homeowners, condo-owners and renters insurance policies cover you for loss or damage to your property and liability that emanates from your residence.  All three policies cover your belongings regardless of where they are as well as injuries to others that happen at your residence. In addition, a condo-owners policy protects you against damage to the part of your condo that you own (generally the walls in).  A homeowners policy protects you against damage to your home and any other structures. While that seems quite straightforward, there are some nuances that make the coverage more complicated. In this post, I’ll provide you six tips that will help you better understand your coverage.  In the rest of the post, I will use the term “homeowners” to include both condo-owners and renters.

1 – Read your homeowners policy

If you’ve read some of my previous posts (such as this one), tip #1 isn’t a surprise!  An insurance policy is a contract and, like any other contract, I recommend you read and understand it.  To be clear, I’m referring to the 30-or-so-page document with the details of your coverage, not your declaration page which is the 2-3-page summary of what you bought.  I get a paper copy of each of my insurance policies every year. If you don’t get one in the mail, you may need to ask for one or visit your insurer’s website to get a copy.

With insurance, it is a little less critical to read the policy before you buy it, as there isn’t anything you can do to change the policy wording itself.  The wording of personal insurance policies is approved by the state or provincial insurance regulators.  Nonetheless, you’ll want to read your policy to make sure you understand what is and isn’t covered. An insurance policy is actually fairly easy to read.  My recollection from when I took actuarial exams a gazillion years ago is that the policy must be readable at the sixth grade level. So, while it has a lot of pages, it shouldn’t take you more than a half hour to read the policy (maybe a little longer the first time).

2 – Carefully check your declaration page

Your declaration page lists all of the coverages you purchased, the dollar amount of limit you bought for each coverage, the locations that are insured and any endorsements you purchased.  You’ll want to check this document before you buy.   Here are several things to check:

Is the location right?

It probably is. However, I reviewed a relative’s policy one time and saw that his rental property was missing from the declaration page.  If there had been damage to the rental property, my relative would have had to first prove that the insurer or agent made a mistake by not including the rental property and then could have made a claim.  Fortunately, by reviewing the declaration page for him, I found that the rental property had been omitted before he had a claim.

Do the limits make sense?

  • If you own a home or condo, does the structure limit seem reasonable?  Remember it is the cost to re-build your house or condo. For many years, that amount was much higher than I paid for my house, as existing homes were much less expensive than building a new home.  In “hot” markets, the re-build cost could be lower. So, be sure to think about the re-build cost, not the market value.
  • Do you have any other structures, such as detached garages or workshops?  If not, you don’t need much limit for other structures. If so, make sure the limit is high enough to re-build those structures.
  • How much would it cost to replace all your “stuff,” known as personal property?  In most jurisdictions, the personal property limit on a homeowners policy is automatically set to 50% of the limit for the house.  That amount may be right on average, but isn’t necessarily right for each individual. When I lived in California, housing prices were very high.  As a young homeowner, my personal property was not worth anywhere near 50% of the replacement cost of my home. For places with a very low cost of housing, the opposite can be true.  You can’t change the personal property limit in some jurisdictions, but it doesn’t hurt to ask if this limit doesn’t look reasonable. If you have a condo-owners or renters policy, you get to select the limit.  (In Tip 5, I talk about creating an inventory with photos. It will be helpful for estimating your limit, too.)
  • Do the limits on specific items, such as jewelry, musical instruments and collector coins, need to be raised?  Not all policies have the same items with these types of limits, so be sure to check your declarations page if you own any individual items or collections that are particularly valuable.  Most insurers can add an endorsement (essentially a few extra paragraphs that change the terms of your policy) to increase these limits.

Are there coverages you don’t need?

There are a large number of other types of endorsements that either restrict or add coverage.  The names of the endorsements on your policy are listed on your declaration page and the wording should be attached to your policy form.  If not, ask for it!

Take a look at these coverages to make sure that there aren’t any that you shouldn’t be buying. I had one relative who reviewed his declaration page and found that he was paying for sump pump failure coverage.  That endorsement covers repairs due to water seepage when a sump pump fails. His house didn’t have a sump pump, so the coverage was unnecessary. It is harder to figure out if there are endorsements you should have that you don’t. If you are insuring your first home or condo, you might want to talk to your agent or insurer to review the types of endorsements available to figure out which ones you might want to purchase.

3 – Make sure you understand what isn’t covered

A homeowners policy does not provide coverage against everything that can happen.  In fact, the policy includes a long list of causes of loss or perils that are not covered.  Many of them are not covered because they are under the control of the insured. That is, if the insured does something to cause a loss or neglects to do something that could have prevented a loss, it is considered intentional.  Intentional acts can’t be insured.

Other perils, floods in particular, are not covered because the potential losses are considered (at least by the government) to be so widespread as to be too big for the insurance industry.  If you live in a flood zone, you can buy flood insurance from the National Flood Insurance Program.

Some perils, such as earthquakes, are not covered because they are so expensive that insurers require you to purchase them separate from the rest of the policy.  By separating the very expensive coverage, the rest of the coverage becomes more affordable. When I lived in California, the cost of earthquake coverage was more than the cost of the rest of my homeowners policy.  In addition, the earthquake coverage had a 10% deductible. I chose to not buy the earthquake coverage because it didn’t fit in my budget. Fortunately, we didn’t have any earthquake damage.

There are several sections of a homeowners policy that identify exactly what is and isn’t covered, so be sure to look for all of them.

4 – Be aware of little extras that are covered

You may be surprised by some of the costs that are insured under a homeowners policy.  You’ll want to make sure you are aware of them so you can recover the full amount you are due from your insurer.   One example is additional living expense coverage.

additional living expense coverage pays for the increase in your living expenses so you can maintain your normal standard of living if your residence is uninhabitable due to an insured peril.  It also provides coverage if you are required to evacuate due to an emergency. That is, if you need to rent an apartment for several months or stay in a motel for a while, it will be reimbursed by your insurer.  Any reimbursement will be reduced by the portion of your deductible that wasn’t used by the damage itself.

As an example, there was a fire in a transformer in my mother’s condo building.  The building was declared uninhabitable for a little over a week. In addition, the smoke was bad enough that her walls, ceilings and all of her belongings had to be cleaned.  It turned out the ceiling had asbestos that had to be removed. The building insurance covered the asbestos abatement and cleaning, but she was responsible for the rest of her costs so submitted them to her insurer.  Her insurer not only paid to replace her belongings that were damaged by the smoke (such as her TV and computer), but also the cost of her plane ticket to my house for her initial evacuation period and the cost of a residential hotel for a month while her condo was cleaned and abated.

There are several other such extras, including financial loss if someone forges your signature and worldwide coverage for loss or damage to your personal property (not just when it is in your home).  You can find out more about these coverages when you read your policy. (Hint, hint.)

5 – Be ready if you have a claim

A homeowners insurance policy has a list of duties for the insured in the event of a claim.  These duties include promptly notifying your insurer or agent, notifying the police if there is a crime and protecting the property from further damage.  When you have a loss, the insurer may send someone fairly quickly to help you prevent further damage, such as drying carpet and furniture to try to avoid having to replace it or tarping or boarding up windows or roof damage.

Keeping an inventory of your belongings is one of the most important things you can do (and one that I have been remiss in doing).  If part or all of your residence is destroyed, such as in a fire, you’ll need to provide the insurer with a list of what was lost, including the quantity, replacement cost and age.  Obviously, it is impossible to keep a list of every item you own! The most important things to put on the list are those that are valuable – electronics, cameras, furniture, jewelry and watches, collectibles and the like.  It is particularly helpful, especially for unique items, if you take pictures of the items and the receipts and store them outside your residence (e.g., on the Cloud). If you have a loss, you will be able to access that information as documentation for the insurer.

6 – As always, buy the highest deductible and highest liability limits you can afford

A deductible is the amount that you pay on each claim before the insurer starts reimbursing you for your loss.  On a homeowners policy, the deductible applies only to the property coverages, not liability. When an insurer sets the premium for a policy, it has certain expenses and often a profit margin that are essentially percentages of the losses it pays to or on behalf of insureds.

If you buy a lower deductible, the losses paid by the insurer will go up.  Your premium, though, will go up by the insurer’s estimate of the average amount of insured losses it will cover under the deductible plus the insurer’s additional expenses and profit margin. The additional premium could be 125% to 150% or more of the additional losses.  If you can afford to pay more on each claim through a higher deductible, you won’t have to pay the additional expenses and profit.

You may be legally responsible for their medical expenses, lost wages and other costs of someone gets injured or dies due to a condition that exists at your residence.  If those costs are more than your liability limit (including the limit on any umbrella insurance you buy), you will become legally responsible for those costs. A higher liability limit can reduce your chance of becoming liable for these types of costs.  Of course, a higher limit also increases your premium, so you’ll need to evaluate both your deductible and the premium for a higher limit in the context of your budget.