Retirement Planning For Dummies
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Protecting your retirement funds from disaster is a critical part of retirement planning. That’s where insurance comes in. You want to make sure your plan can withstand an unexpected event. Typically, health scares are the culprits in disrupting a plan, but home and auto accidents can be major expenses, too.

Find your insurance declaration pages. These documents will tell you how much coverage you have, which you’ll need to evaluate your plan and make certain you’re protected.

Check property and casualty coverages

If you’re planning for retirement, it’s important that you have in place the right amount of automobile and homeowner's (or renter's) insurance coverage, in addition to healthcare coverage:
  • Automobile insurance: Your car can be the source of enormous financial losses, not only to your vehicle but to someone else's vehicle and other personal property. Additionally, the financial hit from injuries can wipe out a financial plan overnight. If you’re nearing retirement age, you likely have significant assets to protect. Simply accepting the minimum coverage required by your state is likely not enough.
  • Homeowner's (or renter's) insurance: If you own your home, it might be one of the pieces of bedrock in your financial plan. If you don’t have rent or a mortgage, you’re well ahead of those who spend 30 percent of their budget for housing. Protecting your home from a devastating fire or other catastrophe is important. Don’t count on the insurance company to verify that you have enough coverage. Renters insurance can help safeguard your personal belongings.

Insurance needs remain fairly unchanged as you near retirement—you need to protect your home whether you’re 34 or 64. But one factor that you might want to modify as you age is your deductible.

Your deductible is how much of a loss you’re responsible for in an accident. Let’s say your car sustains $1,500 in damage. If you’re young, you might not have the financial resources to handle a large hit and so you opt for a lower $250 deductible. The lower deductible comes at a cost, in the form of a higher monthly payment.

As you age, however, you probably have a larger financial reserve. One easy way to save money on insurance is to push up your deductible to $1,000 and save on your monthly premiums.

Log into your insurance provider’s site, as shown, to see whether a higher deductible is available. You’ll also want to double-check that the limits are appropriate.

insurance policy limits Check your homeowner's and auto policy limits to see if you can boost your deductible to lower your premiums.

Get ready for a rainy day: Umbrella insurance

Knowing your coverage limits on your automotive and homeowner’s insurance policies unlocks the next phase of insurance. As you age and amass more money, you have more at risk from a big accident. Not only do you have more money to lose, you have less time to recover from a financial blow.

After looking at your limits on your homeowner’s and automotive plans, you might see a disconnect. If your net worth exceeds your insurance limits, that’s a red flag. If you’ve accumulated a big nest egg, you don’t want to see it evaporate if you’re caught in a massive car pileup on the freeway. Similarly, if someone gets seriously hurt on your property, lawsuit damages can be enormous.

How do you protect yourself other than never leaving the house or never inviting someone over to visit? Enter umbrella insurance, which unlocks millions of dollars of extra coverage beyond what your homeowner’s and auto policies cover.

Umbrella policies don’t kick in until the limits of your homeowner’s and automotive policies are exceeded. Because the umbrella policy doesn’t pay anything until your homeowner's or auto policy’s limit is topped, the rates on umbrella policies tend to be reasonable. It’s common to buy $1 million of coverage for $100 or $200 a year. It’s a small price to pay for such a large amount of protection and peace of mind.

How much umbrella coverage to you need? You could figure it out yourself, but I like Kiplinger’s How Much Umbrella Insurance Do I Need? calculator. The calculator, which is shown here, helps you buy just enough umbrella insurance to safeguard you from a major financial shock.

umbrella insurance Kiplinger’s umbrella insurance tool helps you protect yourself without paying too much.

To use the calculator, start with your net worth and work backwards:

  1. Enter your net worth. Your net worth is the value of what you own minus what you owe.

    To err on the side of safety, consider buying an umbrella policy valued at your net worth. Yes, some of your money is protected against creditors, as you’ll see in Steps 2 and 3. But when you take the money out of protected accounts, such as retirement accounts, it’s exposed. This approach isn’t necessarily recommended, but it's a conservative way to go.

  2. Enter your home equity value. The equity value is the market value of your home minus mortgages or loans. Most states protect at least some of your home equity. The Kiplinger calculator can tabulate how much of your home equity is at risk.
  3. Enter your retirement plan balances. Enter the value of your retirement plans, including 401(k), IRA, Roth IRA, SIMPLE IRA, and SEP IRA. Assets held in these accounts are protected from creditors.
  4. Set a limit to your homeowner's and auto policies. Remember that your auto and homeowner’s liability coverage pays injury claims first. Most umbrella policy insurers will require your homeowner's liability limit to be $250,000 or higher. And you’ll likely need to have a per-person liability limit on your auto policy of $250,000 or more and $500,000 per accident.

You’ll usually get the most bang from your insurance buck if you raise your auto and homeowner's liability limits to the lowest required by your umbrella policy provider. Because you buy umbrella coverage in giant $1 million chunks, you can usually boost your total protection at a lower cost with an umbrella than with homeowner's or auto policy limits. Also, to save money on premiums, see if you can get your umbrella policy from the same company that provides your auto and homeowner’s policies. It’s also easier to coordinate payments from a single company.

Protect your family with life insurance

Thinking about all the things that can go wrong in life is no fun. That’s why I left the chapter on insurance for the end of the book. Planning for retirement should be fun. It gets you thinking about what’s most important in life and how to enjoy what you have for as long as possible.

But you need to prepare for unhappy events, too.

Understanding the benefits of life insurance

Life insurance isn’t for you. It’s for your beneficiaries. You buy a life insurance policy on your life with the idea that it will cover your financial role if you pass away. Life insurance is especially critical when you’re starting a family. If you’re the primary breadwinner and you die, imagine the financial hardship your family would suffer.

To combat this potentially cataclysmic crisis, you can buy a term-life insurance policy. By agreeing to pay an annual premium, if you were to die in a certain amount of time (or term), the insurance company agrees to pay out a pre-determined sum of money. The premium is the fee you pay to keep the policy active.

Life insurance is there only to take care of people who count on you financially, after you die. If you’re not supporting anyone financially, you probably don’t need life insurance. Also, other forms of life insurance wrap savings and investment plans in with the death benefit. These plans are called whole-life plans. Whole-life plans might make sense for a subset of people, but they’re so complicated and potentially expensive that you should consult with an expert before buying one. Or you could just buy a term-life insurance policy and keep it simple.

Estimating how much life insurance you need

If you decide that you need life insurance, the next question is how much coverage you require. Some excellent online calculators, such as the following, can help you make the calculations:
  • LifeHappens Calculate Your Needs calculator: Steps you through the important questions you need to answer to decide how much life insurance coverage you need. As you can see in Figure 16-8, the site shows you the two variables that determine how much money your dependents would need if you died and in the future. The site helps you measure both.
life insurance tool LifeHappens provides many useful tools to help you see how much life insurance you need.
  • LifeHappens Human Life Calculator: Puts a price tag on your existence by showing how much of a financial blow your family would suffer if you died today. Putting a price tag on your life is another way to think about your life insurance needs, as you can see in the sidebar, “What’s a Life Worth?” The calculator is an eye-opening tabulation of what a human life is worth.
  • Bankrate Life Insurance Calculator: Looks at the question of how much life insurance you need in a slightly different way. Most life insurance calculators differ in their approach, so it’s a good idea to run your numbers through a few.

Don’t fixate too much on how much life insurance you need. The biggest question is whether or not you need it. And if you do need it, don’t waste any time. Just buy it. An easy rule-of-thumb on how much you and your spouse collectively need is to buy? You’ll want a policy with a payout that’s 10 times your combined household income.

Buying life insurance

Talk about a tough sell. How would you like to buy something that costs you money every year, doesn't benefit you personally, and pays out only if you die? Not exactly uplifting.

That’s why the moment someone hears that you’re interested in buying life insurance, sellers will come out of the woodwork to sell you a policy. Just search for life insurance online and you'll get life insurance ads on your screen for months.

If you do decide that you’re ready to buy a policy, first check with the carrier that provides your auto, homeowner’s, or umbrella coverage. Most also sell life insurance and provide a multi-policy discount. In addition, online insurance forums, such as and SelectQuote, will shop your insurance needs against a network of bidders. You can then compare coverage and prices to get the best combination for you.

About This Article

This article is from the book:

About the book author:

Matt Krantz is a nationally known financial journalist who specializes in investing topics. He's personal finance and management editor at Investor's Business Daily. He's also worked in the financial industry and covered markets and investing for USA TODAY. His writing on financial topics has also appeared in Money magazine, Kiplinger's, and Men's Health. Krantz is the author of Fundamental Analysis For Dummies and co-author of Investment Banking For Dummies.

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