William Lako: Life's unexpected twists: Why insurance is a cornerstone of your plan

When investors first meet with an adviser to discuss their financial situation, many are surprised at how much of the conversation revolves around insurance—life insurance, disability insurance, liability insurance, and long-term insurance are typically at the top of the list.

If you've consulted with a registered investment adviser, you've likely selected them because they are typically fee-only, meaning they don't earn commissions by selling investments or products. So why engage in such a detailed discussion about insurance?

Insurance provides a stable foundation for building your financial plan. You can have a beautiful castle and adorn your family with jewels and riches, but without a moat to protect your castle, you are vulnerable to marauders scaling your castle walls. In more contemporary terms, an unexpected death, lawsuit, prolonged hospitalization, or major injury could affect your ability to earn money or significantly impact your spending, potentially depleting your assets much sooner than planned.

Most investors base their spending budget on their income, relying on incoming funds to cover bills and save for future expenses like college tuition, vacations, major purchases, and, of course, retirement. If one spouse were to pass away, it is likely that the surviving spouse would struggle to maintain the family's lifestyle. The mortgage might become unaffordable, childcare could strain the budget, or older children might need to revise their college plans. Life insurance can help ensure that life plans remain on track if there is suddenly one less source of income.

While life insurance is essential for safeguarding a plan, adults are statistically more likely to suffer a disability than to pass away. Disabilities—whether resulting from an accident or an illness—can be a costlier drain on your finances because you could be unable to earn and may incur expenses for care.

As we all know, life happens when you're busy making plans. In the event of an accident and a resulting lawsuit, an umbrella policy offers coverage against catastrophic liability exposures. It extends the coverage provided by your automobile and homeowner policies by adding one million dollars or even several million dollars more to the policies' liability limit. With any judgment against you, not only your current assets but also your future earnings could be at risk.

Once your children are independent and you have grown your assets while enjoying a comfortable retirement, you may find less need for life insurance. The death of a spouse, while tragic, is less likely to disrupt your plan. However, a chronic illness, prolonged hospital stays, or the need for constant nursing care can deplete retirement assets much faster than anticipated. While long-term care events usually occur later in life, their costs can hinder life goals such as legacy charitable giving or funding grandchildren's education.

Remember that insurance coverage is a balance between your budget and risk management. Your financial adviser should be able to connect you with trusted insurance agents who can assess the vulnerability of your unique circumstances and provide recommendations regarding appropriate coverage amounts.