Do You Have Enough Insurance?

This is a guest post about insurance from fellow blogger, Robert at The College Investor.  He writes about personal finance and investing for young adults.

Lately, I have been consumed with planning for the unexpected, as I’m a firm believer that nothing is really unexpected. People get jobs and lose jobs, the stock market goes up and down – these are just the basics of life. As a result, it is important to plan for unexpected events. Part of that planning involves savings (your emergency fund), but another large part of emergency planning for most people involves insurance.

Insurance can be a great way to have some protection should the unexpected happen. Car accident? Your insurance can save you from buying or repairing your car. Heaven forbid you die, but life insurance can provide for your family in your absence.

Without sounding like a salesman, here are some things to consider for the main types of insurance to think about whether you have enough for life’s rare events:

Auto Insurance

The first big one that most Americans need is auto insurance. If you own or drive a car, this one is a must (in fact, many states require you have certain insurance minimums to drive). Furthermore, the largest amount of personal liability claims in the United States stem from auto accidents. This is where you could be personally liable for someone else’s property or injury.

There are two main types:

• Comprehensive – Covers damages caused by something other than another vehicle (such as theft, falling tree, etc.)
• Collision – Covers damage to your vehicle caused by impact with another vehicle

Comprehensive is more expensive, but it can be valuable to have if you have an expensive car. Once your car gets old, you don’t usually need to pay the extra cost because it is usually cheaper to buy another vehicle.

Important things to think about:

1. Cost of the policy versus cost of the vehicle (do I really need comprehensive?)
2. Remember – you only pay if you were at fault – it may be worth it to have an extremely high deductible to save on monthly payments (like a $2,000 deductible)
3. Every policy comes with bodily injury liability – do you have enough?
4. Are you paying for extras that you never use? These include towing and assistance

Life Insurance

Another area that most Americans need insurance is life insurance. I could write ten posts on all the different types of life insurance policies and which is best for you, but I’m going to stick to term, as it’s the least controversial (hopefully!). Basically, if someone depends on you for income, such as a spouse or family, you need life insurance. If you died tomorrow and they depended on you, what would happen? Getting a term life insurance policy for 30 years is pretty cheap compared to the benefit you gain.

When looking at term and benefit, here are some things to consider:

• For term, it should be long enough to get you through the stage of life when people will be super-dependent on you. This could be while your kids are at home, or until you get to retirement. For most people, 20 or 30 year policies make sense (if you are in you mid-20s and get a 30 year policy, it will end in your mid-50s, when hopefully your kids are grown and you have a nice nest-egg).

• For your benefits, you should have enough money that it will be able to passively replace your income after taxes. For example, if you brought home $40,000 after taxes, you would want a policy that would do the same for your family. I’m the eternal pessimist when it comes to this calculation, as I would want my passive income to be as tax and as risk-free as possible. As a result, my return would be really, really low. For example, if your benefit was $2,000,000, and you received a 2% return each year, this would earn your family $40,000. Some other things to consider are eliminating big expenses in your family’s life – such as a mortgage. By lowering their expenses, they would need less to live on each month, and you could get a lesser policy.

Final Important Note:

Don’t depend on just your employer’s policy! What if you lost your job? Then you would be out of the insurance too!

Property Insurance

If you own a home, this one is a must! In fact, most mortgage lenders require that you maintain a basic level of insurance to keep your mortgage. This insurance basically covers your home in the event of a fire or other catastrophe covered by the policy. Remember, it is just for the improvements, not the land, since it is assumed the land will still be there after disaster.

All policies cover the following features, each of which can usually be negotiated:

• Dwelling
• Other Structures (Including porches, pool houses, etc.)
• Personal Liability (If someone gets hurt at your house)

By adding up the dwelling and other structures, you essentially get the replacement value of your home. This is the primary driver of your insurance rate, and it is the one you can negotiate the most on to get a good deal. Don’t under-insure, or you will be hurt in the even of a disaster. Watch out for over insurance, which happened to Sam at the Financial Samurai when he was scammed by his insurance company.

Also, you can raise your deductible for buildings insurance, just like you would on car insurance, to get a lower monthly premium. Usually, you can go as high as 2% of the insured value, which may be worth it if you plan on only filing a claim in the worst case scenario.

Some other options for homeowners that live in certain areas:

• Flood Insurance
• Earthquake Insurance

These cost a little more, but if you have a lot of equity in your home, it could be very valuable. If you don’t have equity, stay away from these products as it will just be cheaper to walk away.

Renters Insurance

Don’t own a home yet? Well, you should consider getting renters insurance. This is essentially personal property insurance, and it is very, very cheap to get! It basically protects your stuff, and as a renter, your landlord’s insurance doesn’t.

The great thing about it is the cost – very cheap – and the fact that if you file a claim, they can’t raise your deductible.

Robert’s Tip:

When I was renting, I didn’t think I needed this as I just owned a bunch of junk. But, when I was renewing my auto insurance, my company told me that I could get a multi-policy discount if I had renters insurance. I could get the cheapest coverage – $4,000 for $4 per month, and it would actually save me $20 per month on my car insurance!

Valuable Personal Property Insurance

Are you married? Do you have a wedding set? Well, of course, when I married my wife I got her a beautiful engagement ring and band set, and it cost a pretty penny. Also, no offense to my wife, but she is pretty clumsy. As a result, this is the type of insurance you want to get!

It is not as cheap as renters but it does cover specific assets you don’t want to have to replace. And it covers them for just about any circumstance. For about $10/per thousand/per year you can get a nice policy that covers your valuable assets.

Short Term/Long Term Disability Insurance

Just like life insurance, disability insurance is a must if people depend on your income. What happens if an accident does happen and you can’t work. This impacts 1 out of 5 Americans each year.

Short term disability is designed to cover you for a short term, usually less than a year. This can be helpful if you had something occur like a car accident.

Long term disability is designed to replace a portion of your income for life. This is if you become permanently disabled and can’t work.

Both scenarios do occur, and most employers offer these policies very cheap. If you are working, consider signing up for these, as they can be a lifeline if something does happen.

Umbrella Insurance

Umbrella insurance is also known as personal liability insurance. It protects you if someone sues you. It guarantees an amount of money to pay, and it usually provides for an attorney to defend you. So, when you hear that someone has a $1,000,000 umbrella policy, it meas they have $1,000,000 of personal liability insurance.

As I mentioned above, the most common liability suits emerge from auto accidents. Let’s say someone sued you because you hit them on the freeway. If they were badly hurt, had to be life-flighted to the hospital, it can get very expensive very quickly. If your policy only covered $100,000 of bodily injury, but the total cost was $250,000, you would be on the hook for $150,000 when the auto insurance company settled.

This is where your umbrella policy would kick in. It would provide the remaining $150,000 to protect your assets, such as your home. If you had to pay and you didn’t have umbrella insurance, it could essentially bankrupt you. And if you still couldn’t pay, you could have your wages garnished until it was all paid!

What to consider:

If you have a net worth of over $100,000, and your 5 year earnings are going to be over $200,000, you should consider getting this type of policy. It is not expensive, and it can really protect you.

Also, make sure that you know when your umbrella policy kicks in. It is so important for all your policies to jive – if you have $100,000 in auto liability, make sure that your umbrella kicks in there, and not at $500,000 – otherwise you still have to make up the difference!

Final Thoughts

As you build wealth, a family, and home, it is equally important to protect those things. Some people are able to do it out of having just a ton of money, but most people aren’t. That is why insurance is so important. To me, it is just as important as diversifying your portfolio or creating multiple income streams.

With that being said – it is still hugely important to get a good deal. Shop around on insurance, compare rates, and don’t be afraid to renegotiate your premiums!

Readers, what are your thoughts on insurance? Do you have enough? Are you overpaying or underpaying?

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