Insurance: What You Need (And What You Don’t)

(Since I'm still recovering from my finals last week (and attempting to squeeze my fleeing brain back into my skull), I thought I would take a little break today and share another guest post of mine that was originally published elsewhere (in this case, on My Life ROI).  Here you are, a short guide to your insurance needs.)

It's trite, it's contrived, and like so many sayings, it just so happens to be true: ‘stuff' happens.  The more, uh, explicit form of this saying has a colorful term used to describe this ‘stuff', and to label it as universally bad.  Sadly, too much of the time it seems that the bad ‘stuff' does come more often than the good in our lives.  This is where insurance comes into play.

In an ideal world, there would be no need for insurance, because negative, unplanned events would never happen.  Alas, we do not live in an ideal world, so insurance is and will continue to be an important part of any financial plan.  There are a variety of insurance types you will encounter.  Below, please enjoy (if ‘enjoy' is the right word to use for a discussion of insurance) a short checklist of some of the major types of insurance you should have to protect yourself and your family:

Life Insurance

What Is It: Sadly, life insurance does not ensure that you are not kill-able, thus making you immortal.  Rather, it does ensure that if you do die during the coverage period, your family or other survivors will receive a financial payment, known as the death benefit.  In this way, you can ensure that your loved ones have a financial cushion if something happens to you.

What Types Are There: Life insurance comes in two main varieties: term and cash value.  Term insurance covers the insured person for an agreed upon period of time (the ‘term') or comes in an annually renewable form, and provides the agreed upon benefits if the insured person happens to die during the coverage period.  Cash value (or permanent) insurance comes in a variety of forms, such as whole life, universal life, and variable universal life, all of which will build asset value over time, in addition to providing coverage in the event of death.  There is much discussion and debate over which type of insurance is best for a given segment of the population; to make a long story short, if you have no problem saving and investing on your own, you'll likely be best served with a term policy covering the period during which you need insurance.  It'll be cheaper, easier to buy on your own, and will do just what you need (provide a cash payment to your heirs if you die) from your life insurance.

Who Needs It: If you don't have a spouse, children, or any other dependents, you don't need to bother with life insurance, as nobody will suffer financially from your death.  (Emotional suffering is another matter, one unable to be addressed by a life insurance policy.)  Similarly, if you are retired or otherwise living off your investments, just pass on the investments rather than worry about life insurance.  You will need insurance, though, if you have family members or other dependents whom depend on your earned income to meet all or part of their needs.  If you have a spouse who is unable to work, parents whom you help to support, or dependent children, having insurance to cover them during your working years or until they grow up will be vital.

How Much: You'll hear a lot of different numbers, usually expressed in multiples of your annual income.  I've seen recommendations as low as five years' worth of income to as much as twenty times your annual salary.  The exact amount will depend on a number of factors, from how much of your income goes to supporting your dependents to how much you have available in other savings and investments.  The best advice I can give is to be very conservative in your estimates of what your survivors will need, and then add an extra margin of safety onto that (say ten to twenty percent).  If all else fails, shoot for a fairly high level of coverage, in the ten to twenty times your salary range; better safe than sorry, after all.  (And if you are still fairly young and healthy, the added costs of the additional life insurance shouldn't be that great a burden on your finances.)

Disability Insurance

What Is It: Disability insurance provides regular monthly compensation if you become unable to work.  Similar to life insurance, you're not ensuring that you won't become disabled; rather, you're providing for an alternate source of income if you are unable to work.

What Types Are There: There are a variety of features to consider when getting disability insurance, with one of the most important considerations being the degree of disability covered.  ‘Any Occupation' insurance only covers you if you are disabled to the point that you are unable to do any reasonable income producing work.  So if you are a bike courier who loses a leg, ‘Any Occupation' insurance may not cover your disability.  ‘Own Occupation' insurance allows you to collect as long as you are unable to do your ‘own' occupation (in this case, bike courier), no matter what other work you can do.  As a result, ‘Own Occupation' style policies are much more versatile, but also more expensive.

Who Needs It: As with life insurance, you'll need disability insurance if you need to work for your income rather than living off investments.  The risk that you could become injured, as a result of an accident or illness, is something that all of us have to confront.  Even if your place of employment has no on-the-job hazards associated with it, it's still important to have coverage in case something untoward happens to you outside of the office.  (Chances are that you don't walk from your office right into a hermetically sealed bubble, after all.)

How Much: First, you'll need to check with your employer to determine how much (if any) coverage they provide and the conditions attached.  If you need more, which you might since the average group plan only will cover 60% of your salary (or if your employer doesn't provide any coverage at all), you can find individual coverage (although it will tend to be rather pricey).  Look to provide 70-80% of your salary in benefits (if not more), assuming that the premiums are within range for your expenses.

Automobile Insurance

What Is It: Automobile insurance will insure your car, if you happen to get into an accident.  It will also typically covers damages to other persons or property while using the car, damage from non-accident sources, and other automobile expenses, depending on the specific policy.  As a result there are actually a number of types of policies covered under the rubric of auto insurance.

What Types Are There: There are liability policies, which pay for the damage caused to other people or their property.  The typical liability policy limits will be quoted as a series of three numbers, as in 15/30/5.  These represent the liability coverage for one person, for all the people involved in the accident, and for property damage, respectively.  So this example policy covers $15,000 in bodily injury damage to one person hurt in the accident, $30,000 in total bodily damage for everyone injured, and $5,000 in liability for property damage.

There are several other types of automobile insurance which you may wish (or need) to add to your policy.  Collision coverage, which covers damage to the car itself in a collision, and comprehensive coverage, which covers non-collision damage to the car, are usually limited to the market value of the car.  Uninsured and underinsured motorist coverage will provide payments to you if you are in an accident with someone who has no (or insufficient) insurance coverage.  Finally (or at least, the last of what we're going to bother covering here), there's Personal Injury Protection (PIP), coverage that will pay your medical expenses, lost income, and disability expenses if you are injured in an automobile accident.

Who Needs It: Short answer, most of us.  Automobile insurance is the first type on our list that is actually required by law, at least in some states.  In fact, as we can see from this table, all but three states in the US require some liability coverage (the three exceptions being Florida, New Hampshire, and Wisconsin), and several require other types of insurance, as well.  If you want to stay street legal, you'll need to have at least the minimum coverage required by your state.

How Much: I'll refer you back to the above linked table, which will provide the minimum amounts of coverage you need to drive in your state.  How much you want or need beyond that will come down to your needs, your concern about possible accidents, and the cost.  If you feel you need significantly more coverage, consider getting a policy with a higher deductible, which will help to hold down your premiums (although, it will increase the amount you need to pay out of pocket in the event of an accident).

Homeowner's/Renter's Insurance

What Is It: Both homeowner's insurance and renter's insurance policies cover the contents of your house, although homeowner's insurance also covers the house itself.  These policies will also cover damages that others might incur inside your home (or damage from something like a fire that spreads from your home to neighboring houses).

What Types Are There: Obviously, there's the difference between homeowner's and renter's insurance.  There's also differences in what exactly is covered, although most policies cover many of the same events, making comparisons between different insurance companies that much easier.  Make sure that your policy covers all the unfortunate events that might befall your dwelling (homeowner's policies are notorious for not covering floods, for example) or can easily get additional coverage for the uncovered adverse events.

Who Needs It: Unless you have enough money to rebuild your house, repurchase all your belongings, and provide for health care for anyone who is injured on your property, you'll need some coverage.  (If you do have enough money to do all that, you could do without this insurance, and probably most other types of insurance, as well.  Although, you would still be taking on unnecessary financial risk in order to do so…)

How Much: Enough to cover the cost of rebuilding your home and/or replacing all your possessions, at least.  (Be sure to go for a policy that offers replacement cost coverage (which pays enough to actually repurchase your lost belongings) rather than an actual cash value policy (which pays only for the depreciated value of all your things); you'll pay less out of pocket to refurnish your dwelling that way.)  As with most types of insurance, it's best to be conservative with your estimated insurance needs, so you will have more than you need after an adverse event.

Health Insurance

What Is It: Health insurance provides coverage for your health care expenses.  Health insurance works more as a way to prepay for your eventual health costs rather than insurance against potential unexpected events.  It also tends to differ from other insurance types as most people get their health insurance coverage through their employers (at least, here in the US).

What Types Are There: There are a seemingly endless number of health insurance companies, who will all offer plans with different terms.  Some of the most important issues to consider are the premium being charged each month, the deductible you will have to pay if you need health insurance, and what is actually covered by the policy.  Unfortunately, there's currently little standardization in the types of policies offered by insurance companies, so it will take a little bit of research to find the perfect policy for you.

Who Needs It: Just about everyone who might at some point get sick, who lacks the resources to pay for health care over an extended period of time.  Note that as mentioned above, many health insurance policies are actually offered through employers, so your first stop when searching for health insurance should be your Human Resources department.  You'll generally save money (to say nothing of time and effort) by taking advantage of the coverage offered by your employer.  If you need search for health insurance on your own, there are a large number of issues you need to consider; enjoy this start to your research process.

How Much: Health insurance is generally sold to cover all your health care costs above and beyond the deductible.   The higher the deductible, the less you will need to pay in premiums.  Be sure that your insurance policy will cover any costs you expect to incur, including dental, vision, prescription drugs, and preventative care.  Unfortunately, as mentioned before, there aren't too many standards when it comes to insurance coverage, so making apple to apple comparisons will be difficult.  But I know you're up to the task.

That's it for this overview of insurance types; hopefully you now have a better understanding of everything that could possibly go wrong with your life, and how to protect yourself with insurance.

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