Fundamentals of Insurance
Insurance provides protection. As simple as that sounds, many individuals spend little time considering all of their insurance options and making sure they have the insurance they need, at the most reasonable price. To protect yourself and your belongings, consider these three types of policies.
Let's start with homeowners or renters insurance.
Insuring your home and its contents is very important. If disaster strikes, you want to be protected. Choose a policy that will pay for the cost of rebuilding your home if it is totally destroyed, and make sure the "contents" part of your policy is adequate. A policy that covers the cost of replacing items is better than one the just covers the "cash value" of an item. For example, a six year old dishwasher may only have a $200 cash value, but will cost $800 to replace. You should have an-up-to-date inventory of your belongings and you should keep the inventory somewhere away from your home, like your safe deposit box.
Renters insurance works in a similar fashion. It covers your belongings and provides some level of liability coverage if someone is injured in your apartment.
Auto insurance is also critical.
Auto policies are usually comprised of three parts:
- Collision coverage insures against the cost of repairs to your car after an accident. Choose an amount of collision coverage that reflects the value of your car. If your car is old or has little value, you may want to drop the collision part of your policy.
- Comprehensive coverage insures against damage to your car from random acts like fire, theft, hail, and vandalism. This part of the policy is usually the least expensive and should be based on the value of the car.
- Auto liability coverage is absolutely essential. This covers damages caused by your car. If you cause an accident with your car, and injure someone or damage their property, this part of your policy will pay the injured person's medical and repair expenses. This is usually the most expensive part of the policy and most states require it.
When evaluating these types of insurance, consider the deductible limits of the policy.
The deductible is what you pay before the insurance company starts paying. The higher the deductible, the lower the premium. Before buying a policy, ask what the premium levels would be at different levels of deductibles. Then evaluate the level of "risk" you are willing to assume. You may find that your premium can be up to 25% less by choosing a policy with a higher deductible.
Health insurance is also a necessity.
Most large employers provide medical insurance as part of their employee benefits program. While you may be required to share in the cost, a company provided plan is usually less expensive and has fewer restrictions than a policy bought individually. Choose the level coverage you need, but make sure you are covered for major medical expenses.
Now let's discuss some other types of insurance that may not be essential, but should be considered.
To get extra liability coverage, you may want to consider an umbrella liability policy.
Most homeowners, renters, and auto policies provide some level of coverage for damages caused to others and their property. In this time of large jury awards and rising medical costs, you may want to consider an umbrella policy for additional protection. These policies are usually not expensive. Often a premium of a few hundred dollars will buy over a million dollars coverage. Umbrella liability policies are available from most insurance companies.
Disability insurance is often included in an employee benefit program.
If you employer provides this insurance, check your program to make sure the amount is adequate for your needs. Also, look at the details, including the definition of disability, waiting period and any total limits, to make sure that your policy will provide all that you need. If you need more coverage, talk to an insurance professional or consider policies offered by any professional organization you may belong to.
Long-term care insurance is usually considered by people over the age of 50.
Some estimate that over one half of all individuals will spend some time in a nursing home or other care facility before they die. The costs of this type of care can be very high and the federal Medicaid program will not cover all the expenses you may incur. Premiums will be higher for older buyers. Examine any policy before purchasing it to fully understand what will be covered, what will not be covered, and for how long.
Finally, let's talk about life insurance.
There are three questions to ask:
How much do you need, what type of policy makes the most sense, and where should you buy it?
For most people, life insurance is simply a way to make sure that a surviving spouse and children can continue to have a decent lifestyle. If you have no dependents, you may not need life insurance at all. If you want or need coverage, many experts suggest that a primary breadwinner should have insurance equal to 6 to 10 times their annual income. In most cases, this will provide enough money for the survivors to at least be comfortable. If you have young children or other special needs, additional amounts should be considered.
Deciding whether to buy a term policy or a cash value whole life policy should be carefully considered. Term policies are usually much cheaper, but whole life policies provide for a "cash build up" for the duration of the policy. Reviewing the options with a qualified advisor is essential.
Luckily, life insurance is available from many sources. Start with your employer. Many employee benefit programs provide inexpensive coverage. Term and whole life policies are available from hundreds of companies.
With all types of insurance, look at the insurance company offering the policy.
Quality customer service and financial stability are essential. When you end up needing the insurance, the last thing you want to discover is that the company is hard to deal with, or that their financial condition prevents them from providing the benefits you paid for. Check with the Better Business Bureau and examine the insurance rating reports found in many libraries and on the Internet.
In summary, get the insurance you need, and pay attention to the details of the policies you are considering.
Join us again for another Financial Wisdom podcast. And as always, thanks for listening.