Underwriting is what banks or insurance companies do when they evaluate risks associated with lending money or providing an insurance policy. To underwrite yourself, you need to take a close and honest look at your finances, ask yourself some questions, consider uncertainties and exposures, and evaluate your risk profile on many fronts.
Analyze Your Sources of Income
- The first consideration is your income. Ask yourself these questions:
- Is your salary steady or variable?
- Do you rely on commissions or bonuses?
- Do you work in a cyclical industry?
- If your compensation is variable, you should not carry a lot of debt. Likewise, you should make sure to have an ample cash reserve.
Evaluate Your Debt
- When you are thinking of buying a big item, consider if you can actually afford the item, not just whether or not you can afford the payment.
- Commit to paying off your credit card balances every month.
- Do not buy a home that costs more than 2.5 times your annual income.
- Don’t buy a home unless you expect to live there for several years. A lot of expenses are associated with moving.
Have a Plan to Pay off Debt
- Always have a plan to reduce debt and always think in terms of net worth.
- Aim to pay off your mortgage by the time you plan to retire. If you are not certain that you will be able to do that, your mortgage is probably too large.
- If you have an occasional inflow, such as a bonus or larger-than-expected tax refund, consider using some or all of it to pay down debt, especially credit card debt.
Examine Your Insurance Coverage
- You are required to have homeowners insurance if you have a mortgage and to have auto insurance in most states if you drive.
- If you rent your home, you should have renters insurance, even though it is not always required by landlords.
- Take pictures or videos of your possessions and store the images in a safe place.
- Whole life insurance provides coverage for your lifetime, and there is certainty that you will die and that your beneficiaries will collect, and that certainty is reflected in the cost of the policy.
- Term life policies provide coverage for only a term, or for a certain period of time. Term life insurance is less expensive than whole life insurance, since there is no certainty that you will die during the term of your policy.
- The probability of becoming disabled is much higher than the probability of death. Therefore, disability insurance is a good idea, especially for young families.
- You should consult a financial planner if
- You have substantial assets and your heirs will likely owe estate taxes, whole life insurance may be a good idea—the insurance might be enough to cover estate taxes or other expenses.
- You have a dependent with special needs who will require financial support beyond your lifetime.