Fee-only advisors tend to cringe at the thought of insurance. However, insurance is a necessary evil - simply because individuals cannot afford to pay the costs of an unlikely disastrous event.
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For example, life insurance premiums might seem costly to clients, but the premature death of a breadwinner can leave the family destitute. For those early in their careers, a level premium term policy can provide sufficient, affordable protection.
Buying a long-term disability policy might feel excessive when there is state or company paid short-term disability coverage, but what if the worst-case scenario occurs? In my practice, a successful young dentist suffered a stroke that left him unable to work. Without his long-term disability benefits, he and his family would have lost their home.
Perhaps the most underused insurance is umbrella coverage. When I ask new clients if they have umbrella insurance, the answer is either "yes" or "what's that?" The latter is the most common response. Umbrella insurance is cheap, yet it can potentially protect against financial ruin.
And, of course, as advisors, we also recommend ongoing health insurance, long-term care insurance, property and auto insurance as well as professional liability coverage and more. The costs of one family's monthly insurance bills can total several thousand dollars a month! How can we justify this? Even a conservative $3,000 per month could be worth close to $1.8 million in twenty years at an 8% annual investment return.
In spite of this, we must continue to advise clients to buy insurance of all types. In theory, clients could save huge amounts of money by not paying premiums. Unfortunately, unexpected disasters could derail current financial viability and future security.