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Each situation is different, this article was written for informational purposes only and the opinions mentioned here do not constitute financial advice.
When I work with clients, I review their whole financial picture which includes insurance. The most common gap in their insurance landscape is the following two insurances: umbrella insurance and life insurance.
What is umbrella insurance?
An umbrella insurance is a liability insurance that goes beyond your home and car insurance. It covers you and your family (including pets) if you are sued for damages or injury.
You are usually covered through your car insurance up to $300,000. This $300,000 will cover part of the cost of lawyers and/or settlement if you get sued.
What happens if you owe more than this amount?
You can be liable for up to half your salary for the next ten years and some of your assets. If you cannot pay, you will have to fill for bankruptcy.
Whether you win or not, you may have to pay more than $300,000.
If you don’t own a car, that probably means that you are not covered at all.
Who needs umbrella insurance?
Almost everyone but particularly if you own property, have some savings, have kids, have a dog, participating in sports where you can injure others (skiing, surfing etc.), or have a net worth of more than $300,000 but don’t have a car.
How much does it cost?
Well, it’s pretty inexpensive. For one million-dollar coverage (the minimum you can buy), it’s around $250 per year and around $50 after that for each additional million. I recommend that you buy enough insurance to cover your net worth.
With that type of coverage, the insurance company will send their lawyers to defend you.
What is life insurance?
The primary goal of life insurance is to give money to someone at your death. It’s usually your spouse or your kids but it can be anyone. The beneficiaries won’t pay taxes on the money they receive.
A life insurance policy is NOT and should NOT be an investment vehicle!
Should you buy life insurance?
If you have kids, probably yes, you should – but it depends on your savings, your salary, and other parameters. The goal is to ensure that if something happens to you, they will be financially ok. Here is a quick calculation you can make by yourself to know how much you need:
Amount of debts + Education (kids’ college) + (expenses x number of years your need minimum) – (salary of your spouse x number of years you need) – your savings.
How do you know the number of years you need? Until your kids can take care of themselves and work – theoretically 25 years old.
What are the different types of life insurance?
There are three main types of life insurance. You can add different features to each of them called riders. These products have many different options and I cannot cover all the possibilities here so I will keep it as simple as possible.
You shouldn’t buy them through your work. If you lose your job because of a long term disability, and you die due to this long term disability, you will lose your life insurance.
Consult a professional to pick the life insurance you need. What I mean by professional is not the person selling you the insurance product!
- Term life insurance: the one I recommend the most, by far. It’s an insurance for a limited duration – 10 years, 15 years, 20 years etc. The idea is to pick one with the number of years necessary until your kids can take care of themselves.
It’s the cheapest type of insurance and once you have enough savings to cover the years you need, you can stop paying for it.
- Universal life insurance: it’s a permanent life insurance, meaning that it will last until your death. It provides more flexibility than whole life insurance. You can adjust your premiums (the amount you pay every month or every year) and your death benefits (the amount that will be paid at your death).
Just like with whole life insurance, you can build a cash value. Some of your payment will be “saved” as cash and you can withdraw it at some point in time (usually after retirement) or borrow against them.
This cash value can increase and you will pay taxes on the capital gain if you withdraw the money.
- Whole life insurance: Just like with universal life insurance, whole life insurance has a death benefit but the premiums are fixed. You also build a cash value.
This insurance is less flexible than the universal one, but more stable and usually has a (low) guaranteed return.
I recommend Universal/whole life insurance in some cases where one of the spouses doesn’t work or if most of my client estate is illiquid (real estate). I never ever recommend them as an investment!
How much does it cost?
A term life insurance policy when you are in your early 30’s, a non-smoker, and in good health should cost you around $900/year for two million-dollars for 20 years.
Universal/Whole life insurance – it varies so much that it’s hard to tell, but a client of mine had the following quote for a whole life insurance policy.
He’s 27, a non-smoker: $9,000/year for $950,000 death benefits at the beginning; then he can build a cash value that equals what he contributed after 20+ years; and he will have around $1.3 million in death benefits at that moment, plus a net cash value.
When you buy insurance, always look at the fine print and make sure that you understand what you are buying as much as possible. These can be complex products and don’t forget inflation in your calculation… one million today is not equivalent to one million in 20 years.
Guillaume Decalf from Oui Financial – firstname.lastname@example.org – After a 15-year career in Tech, including nine years in the United-States, Guillaume switched careers by obtaining his Financial Advisor’s License and starting Oui Financial, a firm specialized in financial planning and investments for French people and French-american families in the United States. He is based in San Francisco, California but serves clients throughout the US.