Find the right insurance to fit your financial plan

With federal benefits open season beginning Nov. 14, now is a good time to review the basic forms of insurance you should consider, and possibly use, as part of your financial plan. I’ve listed them in order of importance, for most people.

As you consider your options, ask yourself where each dollar will best be spent. Protection always sounds great — until you consider its cost and what else that money might be doing.

1. Medical. The likelihood and potential size of medical expenses make them the No. 1 financial threat to most financial plans. If you can only afford one kind of insurance, choose medical insurance.

From a financial planning perspective, medical insurance is intended to eliminate the unacceptable — unaffordable — risk from all but the most unlikely scenarios.

An unacceptable risk is one that has the potential to significantly impair or ruin your financial plan. For most of us, this means insuring against large, fairly likely expenses.

It is generally less expensive to pay for the first $500 to $1,000 of your medical expenses each year out of your own pocket than it is to pay a health insurance company to pay those bills for you. The money you save from accepting the deductibles and co-pays that you can afford can be put to better use insuring against other, larger risks.

2. Property. For most of us, the loss of homes or other structures and belongings to fire is the major threat stemming from property loss. For some, the loss of vehicles is a significant financial threat.

Again, the issue is the extent of damage to your financial plan that would follow a major loss. Fortunately, insurance against the loss of important property is usually relatively inexpensive.

Make sure that your coverage is sufficient to protect you against a major loss, and that your insurer won’t nickel and dime you when you have a loss.

3. Disability. As a federal employee covered by the Civil Service Retirement System or Federal Employees Retirement System, your protection against losing your ability to earn income as the result of disability is about as good as it can be.

Supplemental protection is often expensive and offers little real improvement. Insurers are reluctant to insure anyone for more than 60 percent of their earned income, and adding more insurance anywhere near that limit will cost you.

4. Unexpected death. If you depend on someone else’s income to pay for your living expenses, you should carry insurance on their life equal to about 20 times the after-tax income you’d need to replace if that person died unexpectedly.

You may reduce this amount by multiples of one for every year less than 20 that the income would be needed if the person died tomorrow. You may also reduce the insurance by the amount of other assets that would become available to help produce income for you as a survivor.

For example, if a vacation home could be liquidated to produce $200,000 in investable income, this can offset some of the insurance need. The best buy is guaranteed level term-life insurance with premiums guaranteed over the period the insurance will be needed.

5. Liability. I generally recommend that everyone carry at least $1 million in general liability insurance. This can usually be purchased as part of your homeowner’s or renter’s policy. The point is to make sure that you are covered against financial liability, no matter where it might originate — at home, on the street, or on someone else’s property.

6. Long-term care. The place to start your search is the Federal Long-Term Care Insurance Program when you’re in your late 50s or early 60s.

At younger ages, the risk is relatively low, and the cost of the insurance is often prohibitive. I generally like to see my clients consider this coverage when they retire and only if it is easily afforded.

While the risk is large, the cost of premiums and the risks of future rate increases and changes in benefits are high. Start with $200 per day in benefits over five years with the maximum inflation protection available, and then reduce the benefits until the premiums fit your budget.

Cut the benefit period first, then the daily benefit limit. Unless you’re 70 or older, avoid cutting the inflation protection.

7. Dental. Dental bills can be large, but dental insurance is often designed to pay very limited benefits under very limited circumstances. If you can find catastrophic dental insurance at reasonable cost, consider it. Otherwise, pass.

I’ve seen dental insurance pay a few hundred dollars worth of benefits during the year, while the policyholder paid several thousands of dollars for care. This is the opposite of what I’d expect from good insurance coverage.

8. Vision. My advice on dental insurance applies to vision insurance, as well.