Today we’re going to talk about insurance, a subject that many people are confused about. Some people think don’t think they’re confused, but they don’t quite understand the fundamentals of insurance. Let’s go through the basics of insurance and what it really is.
What is an insurance contract? It’s simply when a person gives money to an insurance company and the insurance company takes risk away from that person. Think of auto insurance. A person pays a premium and the insurance company takes the risk away from that person. If an accident happens, then getting the car fixed or hurting someone else in the accident and having to pay for their medical bills is covered by that premium. Pay a premium and the risk is taken away from you.
The Foundation of the Financial Pyramid:
Risk is at the bottom of the financial pyramid. There are three sections of the pyramid and risk is at the bottom. It’s the foundation. Insurance is in the foundation. Why? If you don’t protect yourself from risk, then your growth and income investments don’t matter that much. You could get completely wiped out.
Protect Your Investments, Income & Assets:
You want to protect your income. You want to protect your assets. You want to protect your liabilities. I think the most important thing on this list is income. Think about what happens if you don’t have the ability to earn an income anymore? This would be for instance, disability insurance or death.
Let’s talk about disability insurance, which in my opinion is the most important insurance for somebody that is working can have. If you get sick or hurt and cannot work, you get a check every month from the disability insurance company. This allows you to pay your bills, stay in your house, maybe continue to pay college education. That’s disability insurance, very very important because it protects your income.
Life insurance protects your income or loss of income. Not for yourself, but for others. A personal example is when I was a young family, my wife and I bought life insurance. If something happened to me one day, my wife could pay off the mortgage, educate our children, and have some income. Again, life insurance provides income not for yourself, but for somebody else if you die.
Auto & Homeowner’s Insurance:
You need to protect your assets and that’s what your auto and homeowner’s insurance does. If your house gets hit by a tree, the insurance company will come in and pay for that damage. That’s protecting your assets. If you get into a car accident, the insurance company will pay to repair your car. That’s another asset.
Liability protection in this day and age is important. That’s if you get sued. If somebody slips on your property, you have liability insurance that’s in your homeowner’s policy. If you get sued because of this, the insurance company pays. If you get into a car accident and somebody sues you, the insurance company will pay it. It protects you against having to drain your assets because you didn’t have the coverage.
These are the three basic things that we cover with insurance. I know there’s some other things we can talk about, but I want you to get that basic concept of, “I pay a premium and the insurance company takes risk away from me.” Insurance companies are simply in the business of taking risk away from people to protect income, assets, and liability. I hope this has been helpful for you!
If you still have questions regarding insurance and or retirement planning, we can help you answer them. Request your free 15-minute call with one of our financial advisors today to get started.