How Do Insurance and Financial Planning Work Together?

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By K. Bridget Schneider, CFP®, CRPC®

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Risk management is at the heart of any financial plan.  Being prepared for the unexpected can help you stay on track to reach your financial planning goals if you incur a loss or are injured in an accident, become sick, disabled, or die.  One easy and cost-effective way for many of us to manage risk is through insurance.  Let’s review some types of insurance to see how insurance and financial planning work together.

Health Insurance

Unexpected medical events or critical illnesses can derail a financial plan.  For one thing, you may be unable to work to earn a living.  In addition, payments for an unexpected medical expense could slow progress on your financial planning goals as you divert savings to pay the expense or use your emergency fund.  A health insurance policy can help you mitigate these risks and possibly limit the amount of savings used to pay medical expenses.  

Property and Casualty Insurance

Your home and auto may be among the high-value assets on your balance sheet, and you should protect yourself from loss due to theft or damage of these assets.  A homeowner policy can help protect your financial plan if someone is injured on your property or if a disaster damages your home.  An automobile policy can protect you from financial loss if your car is stolen or damaged in an accident.  It can also provide protection from any damages caused by you or someone driving your vehicle.

Life Insurance

If anyone such as a spouse, children, or other dependents is relying on your income for financial support, you should consider life insurance in your financial planning.  Life Insurance is paid to a beneficiary upon the death of the insured.  It can help them maintain their standard of living, repay debts, and finance some of the financial goals you will not be alive to work towards.  Since the death benefit is also tax-exempt to the beneficiaries, life insurance can be a useful tool to pass wealth to others.  

Disability and Long-Term Care Insurance

Disability insurance and long-term care insurance both help you protect your assets and therefore are an important part of financial planning, but they serve different purposes.  If you are injured and unable to work to earn income, disability insurance can provide an income for you to live on and pay your debts.  Long-term care coverage is used to pay for care when needed due to your inability to perform two of the six activities of daily living or there is a cognitive disability.  

Insurance and Financial Planning Summary

In a way, insurance is like a precautionary investment that protects you from unexpected financial loss.  Some risk situations are devastating without insurance protection, so to protect your financial plan it’s important to consider the types of insurance that are relevant to you.  Whatever types you choose, you should consider your assets and liabilities, your risk profile, and your budget.  Before purchasing the policy, you need to understand the features, terms, and conditions to be sure that it fits into your overall financial plan.

Connections Financial Advisors can help you prepare by discussing how insurance and financial planning work together.  We want to be your friendly financial guide and ally.  Be sure to visit our website today or call us at 217-605-8130. Our mission is to help you make more informed decisions to better your financial position and reduce your financial stress. 

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