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For some, insurance is just one more item on their financial checklist. Whether you mortgage a home, buy a car or start a business, some type of insurance is usually required. But what if, despite paying all your premiums on time, your coverage comes up short when you encounter a loss? 

There are at least three ways you might be underinsured: 

The Home Valuation Problem 

Prices, especially on homes, can rise and fall dramatically. In most cases, the insurer will pay for damage to your home up to the limit set in the policy. But what if that upper limit is no longer enough to replace your home when prices for materials and labor go up due to inflation or other causes?  

Some policies include “extended” or “guaranteed” replacement coverage. It’s not uncommon to see materials and labor jump in price following a natural disaster that damages multiple homes. Extended coverage will increase the maximum amount the insurer will pay, adding a percentage — 20%, for example — to the stated policy limit. Guaranteed replacement is just that: You are guaranteed to get enough money to rebuild your home no matter what it costs. Naturally, both options will add to the cost of your premium. 

The Value of Valuables 

The valuation problem also applies to your possessions. For personal property coverage, you can choose between replacement cost and actual cash value. Replacement value means the insurer pays to replace your belongings with new comparable items up to your policy limits. If you lose your home in a fire and you had an older iMac sitting on your desk, you’ll get enough to purchase a new iMac. However, if you choose the actual cash value option, you’ll get the current cash value of that computer — as determined by the insurer — meaning purchase cost minus depreciation, which is going to be less than the cost of a new comparable model.  

Change in Circumstances 

If you previously had no one financially dependent on you and then get married or have a child, you may be underinsured as a family if you have no life insurance to replace your income should something happen to you. Your children or other family members may develop conditions or needs that your existing coverage is insufficient for. Or perhaps there are now grandchildren you want to include as beneficiaries. Think through all the people in your life who you might want to provide for in the event you’re no longer around.  

Get Help from an Expert 

As with all things related to insurance, seek out a knowledgeable agent or speak to a financial professional for advice to get the coverage you need at the best price and terms. Be sure to read part two of this discussion, where we’ll examine policy exclusions, protection against lawsuit risk and the importance of understanding your health insurance deductibles.  

Sources 

https://www.forbes.com/advisor/homeowners-insurance/replacement-cost-vs-actual-cash-value/  

Lately, it seems we’ve all had to learn more about global economics than we’d like. Thanks to the COVID-19 pandemic, extreme weather in essential manufacturing regions and a container ship mishap in the Suez Canal that wreaked havoc on deliveries for months, there’s no shortage of reasons for soaring prices and low-stocked shelves. With so much uncertainty in the world and all around, you may feel like holding onto cash is a safer bet. But if inflation is on the rise, a dollar today could have less buying power than a dollar tomorrow.  

You may have had to adjust your budget to compensate for rising prices, but have you considered shoring up your retirement savings against the risk of inflation?  

Inflation and Your Buying Power in Retirement 

Inflation impacts the “real value” of investments in your retirement plan because the same amount of money may give you less spending power later. If your expenses are $2,000 per month now, you might need $3,500 during retirement, just to maintain the same quality of life — all thanks to inflation. 

Countering Inflation in Your Retirement Portfolio 

You’re probably aware of 401(k) plans — and may have even heard how they can give you a leg up on your retirement goals. If you have a 401(k) available to you through your job, however, you might still want to know more. Let’s look at some answers to frequently asked questions about your employer-sponsored retirement plan. 

Q: Why is a 401(k) better than a savings account? 

A: For the most part, a traditional savings account doesn’t offer tax advantages. A 401(k), though, allows you to put money aside for the future before you pay taxes on it. You also don’t have to pay taxes on investment earnings from the account as they come. Instead, you only pay taxes when you withdraw from your 401(k) during retirement. By then, you’ll hopefully be in a lower tax bracket. 

Q: How can a 401(k) improve your retirement readiness? 

A: Since your 401(k) is an investment account, you can take advantage of the considerable benefits of compounding returns, which can allow your money to grow at a faster pace than it would in a traditional savings account. This can help put you in an accelerated position to achieve your retirement dreams. Plus, having the money deducted from your paycheck automatically makes it easier to stay consistent with your investment goals over time — you can build wealth without having to think about it as much. 

Q: What are the risks of participating? 

A: Market volatility is always a possibility, so it’s important to understand your personal risk tolerance and create an investment plan that works for you. It’s also why it’s critical to review your retirement plan regularly and rebalance your asset allocation as needed. 

Q: Are there other advantages? 

A: Your employer might offer a match, providing you with a way to put even more money into your retirement account. Additionally, your employer might give you the option of a Roth 401(k), which can result in lower taxes during retirement. Carefully consider your tax situation and individual needs when deciding if a Roth 401(k) makes sense for you. 

Q: What if I quit my job? 

A: Money you put in, plus your investment earnings, stay with you no matter what. Money your company puts in becomes yours based on a vesting schedule. You can roll your 401(k) over to a new employer-sponsored retirement account or an IRA if you leave your job. 

Q: How much do I need to contribute? 

A: Work with your qualified financial professional to figure out how much you need to meet your specific retirement goals. You decide how much you put in from 1% of your salary up to the annual contribution limit. Some retirement plans also allow you to automatically increase your contributions each year, or you can bump up your deferral rate when you receive a promotion or bonus. Consider what you should set aside each paycheck to help you achieve your long-term goals. 

Q: When is a good time to join? 

A: Sign up for your 401(k) as soon as you can. Put time on your side when it comes to reaping the benefits of compounding returns. There can be significant opportunity costs by sitting on the sidelines too long, which can hamper your retirement readiness over the long term. 

Q: How do I sign up? 

A: Contact your company’s HR department for help opening your account and setting up payroll deductions. Enrolling isn’t hard at all — and it can be one of the most important items to check off on your to-do list in order to help ensure a more secure financial future. The specifics of 401(k) plans can vary from company to company, and there’s more to know than what we’ve covered here.  

Contact your qualified financial professional if you have additional questions or to learn more.