As we kick off our new year, it’s important that we take the time to ensure we have adequate insurance coverage to protect ourselves and the ones we love.
Part of this review process means not only looking at our life insurance needs but also our property and disability coverages as well.
So, this week we’re discussing the 3 areas of insurance that every federal employee should review.
#1 Life Insurance
There are a few ways to determine the amount of life insurance needed, but I prefer the “financial needs” approach. This method determines how much life insurance is necessary to provide for your dependent’s lump sum and ongoing needs. Here’s a breakdown:
Calculate expenses and debts, add the following:
- Add existing debts you want to be paid upon your death (mortgage, car loan, etc.).
- Add immediate expenses if you were to die today (funeral costs, short-term household expenses, etc.).
- Add the annual income your dependents will need (a rule of thumb is 70% of current living expenses) multiplied by the number of years you estimate your dependents will need support. Also, consider whether you will need to provide for your spouse after your children have become self-sufficient.
- Add any estimated future education costs for your children.
- Add the amount needed for an emergency fund (3-6 months of living expenses).
Note: If eligible, you should account for your FERS survivor benefit when determining your spouse’s required annual income. Since the benefit is based on your years of service, it will fluctuate throughout your career, but establishing a baseline will give you a better picture of your actual insurance shortfall, if any. Read more about the survivor benefit here.
From the total calculated in Step 1, subtract assets and other insurance:
- Subtract any liquid assets (savings, non-retirement investment accounts, etc.)
- Subtract any current life insurance coverage (including your spouse’s employer-sponsored group policy if you’re covered)
The result is the total coverage you need.
#2 Disability Insurance
Disability insurance can help you avoid depleting your emergency fund or retirement savings in the event of a disability. Contrary to popular belief, a disability could be more financially damning than a premature death because although both events cause income to stop, a disability often brings prolonged increased expenses.
Not only can a disability be more financially taxing, but it is more common than you might think. For example, the Social Security Administration (SSA) says that about 25% of people who are 20 years old today will be disabled for 90 days or more before reaching age 67.
Types of Disability Insurance
There are two main types of disability insurance: short term and long term, and most people need both.
The difference is the length of the benefit period and when the coverage begins. Long-term disability typically has an elimination period (before benefits begin) of six months and can last for many years or until retirement.
While short-term disability, as the name implies, has a shorter elimination period (waiting period) before benefits begin and generally lasts up to 6 months.
What Disability Benefits Do Federal Employees Have?
As a federal employee, you have long-term disability protection via the FERS Disability Retirement, however, you have no short-term disability insurance, except for sick leave, annual leave, or the leave bank.
How Much Disability Insurance Do You Need?
The amount of disability benefit is called coverage, and the amount of coverage you need depends on various factors, such as your occupation and financial obligations. The amount of your coverage should be enough to cover all your non-discretionary expenses.
You should create a monthly budget and extrapolate from there. Additionally, because a disability may result in higher medical bills, you may want coverage that exceeds your current expenses.
For example, since your short-term disability coverage is limited, you may want to have an emergency fund totaling 6-9 months of non-discretionary expenses to supplement your leave.
#3 Property & Casualty Insurance
This often includes your home, auto, and umbrella policies. Considering homeowners insurance protects what may be the most significant investments of your life, that’s where we will focus our attention.
So, how much homeowners insurance do you need? The truth is that every home has vastly different insurance needs depending on where it’s located, how it’s constructed, what’s inside as well as multiple other factors.
Although mortgage companies typically require insurance coverage, they only consider the insurance needed to cover their investment. Therefore, a good place to start your assessment is on the following four primary areas of a standard homeowners insurance policy:
- Dwelling Coverage (Coverage to rebuild your home)
- Personal Property Coverage (Replaces your belongings)
- Liability Coverage (Protects you against the cost of legal liability)
- Additional Living Expenses (Reimburses your additional living expenses incurred from the loss of use of an insured home)
How Much Dwelling Coverage Should You Have?
Ideally, you will want enough dwelling coverage to pay the entire cost minus your deductible of rebuilding your home after a covered accident, such as fire, windstorm, or explosion.
Dwelling coverage includes the structure of your home, all the materials used to build it, and any attachments, such as a garage, deck, or front porch.
To get a reliable estimate of your home’s rebuild cost, do the following:
- Take the square footage of your home and multiply it by the local construction costs. You can find these costs online or contact a local construction company.
- Get a second estimate using a free online calculator. You can find free online calculators that will use your home’s size, basic building material, and location to give you a replacement cost estimate.
- Now that you have two estimates, contact your insurance company and ask for theirs. Typically, if all three numbers are reasonably close, you’ll have a reasonable estimate of your home’s replacement cost.
However, a standard policy won’t account for inflation or any increase in rebuild costs due to local building codes or ordinances changes.
Fortunately, most insurance companies offer endorsements that you can add to your policy to cover rebuilding costs fluctuations. Those endorsements include:
- Extended Replacement Cost: A policy endorsement that increases your dwelling coverage by an additional 10-50% of your policy limit, or
- Guaranteed Replacement Cost: Guarantees to cover your home’s rebuild cost regardless of the increase in costs.
Note: If your home has a detached structure (garage or shed, etc.), you will want to ensure you have adequate “Other Structure” coverage. Use the same steps for your other structures as you did for your home.
How Much Personal Property Coverage Should You Have?
One of the essential features of home insurance is that it can protect your belongings in the event of a covered accident.
Because it’s not just four walls and a roof that makes a home valuable: it’s what’s inside.
Typically, your personal property coverage will be a percentage of your dwelling coverage – roughly between 50-75%. To ensure you have the right amount of coverage, do the following:
Take an inventory of your personal belongings: Your first order of business should be to set up a list of your belongings. This inventory will provide the proof you will need to file a claim and help you keep track of what you own.
The easiest way to create an inventory list is via video. Ensure that you go room by room, taking care to record your furniture, clothing, appliances, and expensive items such as jewelry, electronics, and art.
Certain property types have coverage limits: As you make your inventory, note your expensive items (jewelry, furs, art, computers, etc.) as insurance companies often assign them sub-limits. This sub-limit means that your reimbursement for these items will be limited to a specific dollar amount.
After you have your list of expensive items, contact your insurance company to see if you need an additional policy or an endorsement for them.
Consider upgrading your personal property reimbursement terms: Personal belongings are typically only insured at their actual cash value, meaning depreciation is subtracted from the total reimbursement amount when you file a personal property claim.
Since you will likely want to be paid the full replacement value of your items destroyed, rather than just the depreciated value of your items, upgrading your coverage is the sensible thing to do. The good news is that most companies will allow you to upgrade to replacement cost coverage.
How Much Liability Coverage Should You Have?
Liability insurance covers the cost of lawsuit judgments, settlements, and the legal defense for injuries or property damage caused by you, a family member, or your pet.
When trying to determine the right amount of coverage, think of it this way, if someone decided to sue you, how much coverage do you think you’d need?
Generally, you want enough liability coverage to protect your assets, so if you have $400,000 in assets, it would be prudent to have at least $400,000 in personal liability coverage.
Homeowner policies often only offer liability coverage between $100,000 and $500,000. So, if you have more assets to protect, get an umbrella policy over and above that amount.
Fortunately, liability insurance is typically one of the least expensive types of insurance.
Should You Get Additional Living Expenses (ALE) Coverage?
If you can’t live in your home while it’s being repaired due to a covered accident, how much would it cost you to live in a hotel or other temporary housing?
Additional Living Expenses (ALE) coverage (also called Loss of Use coverage) will reimburse you for the additional costs of living elsewhere.
Most homeowner’s insurance policies use a percentage of your dwelling coverage to calculate your ALE—usually between 20–30%.
Given the nature of this coverage, it is difficult to predict how much you may need; however, if you are risk-averse, you may want to seek the higher end of the limit that your insurer will provide.
Do you need additional coverage?
Depending on your situation, you may need additional coverage not included in a standard policy, such as flood and earthquake coverage. Both of these disasters are generally excluded from homeowners’ insurance coverage.
Flood insurance is available through FEMA and private flood insurance companies, while in California, many insurers offer policies from the California Earthquake Authority. So, take stock of what risks you are exposed to and ensure coverage.
Many of us know that certain life events such as buying a home, getting married, or starting a family requires reviewing our insurance needs. However, a good rule of thumb is to check your insurance needs periodically, for instance, every other year.
Aligning your finances to support the year and life you want is not always easy, and with all the distractions and priorities of life, putting your finances off to the side for later can seem like a reasonable thing to do.
But by putting in the time and effort upfront, you are more likely to move towards accomplishing your goals and living your ideal life. You should consult a qualified financial planner if you need help creating your financial plan.
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