How to Build Wealth While You Are Young: Protect Yourself from the Unexpected

An area of financial planning that is often overlooked by people, both young and old, is insurance. However, having the right insurance in place from a relatively young age can be crucial to your overall financial success. The purpose of insurance is to protect your wealth from financial loss. So naturally, as you begin to build wealth, having insurance becomes extremely important to help ensure that wealth is not lost to an unforeseen circumstance.

Insurance is certainly not the most thrilling of topics, but given its importance, today we are going to highlight the different types of insurance a young person should have.

 

 

Health Insurance

Most people need health insurance to afford medical care—even a minor medical issue can be an extremely expensive proposition. Many Americans get health insurance through their employer or their spouse’s employer. For those who don’t have health insurance available through their job, they can purchase private health insurance on the individual market.

For young people, it is important to remember that if your parents’ health insurance plan covers dependents, you can usually stay on their health insurance until age 26.

The coverage you have when you buy health insurance depends on the policy. When considering different policies, it is important to educate yourself on the myriad of options and acronyms, like HMO, PPO, and EPO.

The goal is to try to match your policy to your specific needs. If you’re someone who doesn’t have a lot of health care expenses, the policy you choose is likely going to look very different from someone who needs to see health care professionals frequently.

Auto Insurance

In nearly every state in the U.S., drivers are required to have a minimum amount of automobile insurance. This minimum amount is called liability coverage, which covers any potential property damage and bodily harm that may result from an accident.

Each state has its own rules for exactly what car insurance you are required to have. It is important to note that most states merely have a minimum amount of coverage that is required—in most cases, a person should have more than the stated minimum.

You also have the choice to purchase additional coverage, which is often recommended. These other types of auto insurance coverage can include uninsured and underinsured motorist coverage, collision coverage, comprehensive coverage, medical payments coverage, and personal injury protection.

Homeowner’s/Renter’s Insurance

Obviously, your living situation will determine what type of coverage you have. If you own a home, you should have homeowner’s insurance. If you rent a place, you need renter’s insurance.

Young people often overlook the need for renter’s insurance or don’t think they need it. The bottom line is that you need renter’s insurance unless you could afford to replace all of your stuff if it were all to go up in flames.

Homeowner’s policies are not as easily “overlooked” because if you have a mortgage, the lender is likely going to require it.

Homeowner’s and renter’s insurance policies include liability coverage, which would pay for costs associated with an injury on your property, as well as property coverage, which would pay if something happens to your home (if you own) and/or your possessions in it.

How much coverage you have will largely depend on how much your covered property is worth and whether you want to have replacement coverage or market value coverage. Replacement value coverage means the insurance company pays to replace the possessions you lost or pays the cost to rebuild your home. Market value coverage would pay only what your home or possessions are worth on the market at that time.

Disability Insurance

This insurance is often available through an employer, but if not, it can be purchased on the individual market. The purpose of disability insurance is to provide income if you were to become disabled and unable to work.

There are long- and short-term disability policies, and the policy provisions will stipulate a certain percentage of income that would be replaced if you were to be unable to work. The percentage typically ranges from 60% to 70% of base salary for a short-term disability policy and between 40% and 60% of base salary for a long-term policy.

It is important to note that each disability policy has a specific definition of what it means to be disabled, so if you shop for a policy, be sure to look for coverage that has a broad definition. If you have a policy through an employer, make sure you are aware of the terms of that policy.

Life Insurance

Generally speaking, if anyone relies on your income, you should have life insurance. There are different types of insurance, including term life insurance, which is the relatively cheap, straightforward way to leave money to a beneficiary if you were to die. With term insurance, you purchase coverage for a fixed period, usually 10, 20, or 30 years.

Some level of life insurance coverage can oftentimes be available through an employer, but it is important to remember that this coverage is typically going to remain in place only as long as you work for that employer.

I told you from the beginning, it’s not an exciting topic! But you can easily see why insurance can be a very costly subject if you ignore it. In all the above categories, an unexpected situation could very quickly lead to financial ruin without insurance in place—whether it’s a car accident, health issue, fire or natural disaster, or death.

All these devastating situations typically cause a high level of stress and emotional pain. Don’t add financial loss to the list.

Contact us for a complimentary needs assessment phone call.

Elizabeth Young, CFP®

As Partner and Senior Wealth Advisor, Elizabeth Young finds it gratifying whenever one of her clients reaches a long-held goal with her help and guidance. Those “aha” moments drive the work she does for our firm, including serving as the primary financial planning contact for clients and overseeing general client service.