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How Much Insurance Do I Really Need?

Before you zone out or click through this post, let me relate a story that changed my view on insurance, one that I think will change yours as well.

Like most people, I’ve gambled with insurance and loss before. You probably recognize the old me. You let an insurance policy lapse and think, “I’ve been paying into this scam for years and never needed it. I’ll get another policy but let’s give it a few months and save a few hundred dollars.”

Then something happened to my boss and I’ve never let a policy lapse since. You see, my boss was trying to sell his house after having moved out. It had sat on the market for a month but was only priced around market value so he didn’t think it would be long before it sold. His let his homeowner’s policy lapse.

A fire ripped through house and it cost nearly $47,000 to rehab… and he still had to worry about getting it sold.

This article, the fifth post in our 5-week personal finance fix, will help you not make the same mistake as my boss. We’ll cover what types of insurance you need and how much insurance you need. You don’t need a Mercedes-class policy for most types of insurance but neglecting the subject altogether could have you taking the bus for the rest of your life.

Check out the first four weeks in our Personal Finance Fix.
Week One: Setting financial goals and how to make a budget you can keep
Week Two: Investing Basics and Beyond
Week Three: Getting to Sandy Beaches: Realistic Retirement Planning
Week Four: 16 Easy Money Tax Tips

Types of Insurance

Types of Insurance

What Types of Insurance do You Need?

The two types of health insurance are indemnity and managed care. Indemnity plans or fee-for-service will generally give you more flexibility for where you go but will cost more out of pocket. You’ll have to pay an annual deductible before your insurance kicks in and be responsible for a co-payment afterwards.

Make sure you ask how the policy determines the amount they will pay. Many policies will pay a percentage of the ‘usual and customary’ fee for the particular medical service in your area, even if that fee is much less than was actually charged by the doctor. You will be responsible for the rest.

Managed care plans use health maintenance organization networks (HMO) to lower fees. It may be cheaper than an indemnity plan but you will be confined to a network of doctors and hospitals, or face much higher bills. Managed care plans sometimes offer point-of-service plans (POS) so you can go outside the network without paying too much more.

There are principally two types of life insurance, term and whole life. Term insurance is the purest form while whole life policies carry an investment component. Whole life policies can take different forms like universal or variable life though they are all basically just different combinations of a term policy with an investment component. Every month, part of your premium goes to the life insurance policy and another part goes towards building the investment value.

Life insurance is a huge game for agents and the majority of your first year’s premium will probably go to paying the agent’s commission. Agents make even more money selling whole life policies so be wary of sales pitches leading you away from less expensive term life. The buildup of cash value isn’t usually enough to compensate for higher whole life premiums and you’ll pay huge penalties for cancelling the policy.

When buying a life policy, make sure you know if your premiums are guaranteed or reviewable. Reviewable premiums may be cheaper at first but may also change in the future. It’s usually better to lock-in a premium with guaranteed terms if you are young and relatively healthy.

Policies to cover your home and car are easier to understand. Most homeowners insurance will cover damage caused by fire, theft, vandalism and natural disasters. Floods and earthquakes are generally not covered. If you are in a flood plain, an area prone to flooding every once in a while, you need to get the extra insurance which usually isn’t much. Make sure you check out how much the policy will cover, including: value of your house, your personal items inside and expenses directly after an event.

How Much Insurance Protection

How Much Insurance Protection?

How Much Insurance do You Need?

Buying insurance can be a pain but you really do need to shop around. Even saving a couple hundred dollars a month can really add up. There are websites like Insure.com that offer online databases of carriers to make the process a little easier.

Unlike home or auto insurance, it’s tough to place a value to replace for your health insurance. Honestly look at your health care visits and expenses over the last year. It may take some time but you need to compare your plan options against how much you would have paid with each. If you go to the doctor often, you may want to pay a little more for premiums that will have lower co-pays and deductibles.

The standard rule for life insurance is to replace between five and seven years of your salary. If you’re younger, you may want to consider a policy that will cover more while you may not need as much if you’re closer to retirement. Consider other investments and income your surviving spouse will have and any debts that will need paid off.

You don’t need life insurance for your entire life. Policies that extend into your 60s and 70s can be extremely expensive and are likely not necessary. After looking at your investments and debts, you may decide that you only need life insurance to cover you for as long as you’re paying off your mortgage or until you would have turned 60 years old.

There are five types of coverage for your car: liability, collision, comprehensive, personal injury and uninsured motorist.

  • Most states have a minimum coverage requirement for liability insurance which pays in the event of an accident that was your fault.
  • Depending on the value of your car, collision coverage may not be worth it given premiums and the deductible.
  • Comprehensive coverage will pay if something happens to your car unrelated to an accident like weather damage, hitting an animal or theft. It can be expensive but is definitely worth it if you still have payments or your car would be expensive to replace.
  • Personal injury coverage will help pay medical bills in the event of an accident. Liability and collision coverage may only pay for repairs to the car.
  • Uninsured motorist coverage isn’t usually very expensive and is another one of those things that is really great to have if you need it.

Some helpful things to remember when choosing a health policy:

  • Group coverage from your employer is usually going to be the best bet. You’re employer did the hard part and negotiated a better rate, grab it.
  • The lowest premium isn’t necessarily the best. Make sure you check out what the policy covers and how much you pay upfront.
  • Make sure you check out the coverage network included in your policy. How much extra will you have to pay to go outside of the network.

Some helpful things to remember when choosing a life policy:

  • Whole life policies carry an investment component but can be several times more expensive than term life insurance. For the investment component, a lot of people choose a policy that will not cover what their family may need but is all they can afford. Consider the cheaper term policy that covers your needs and then invest the difference on your own.
  • Buy an umbrella when it’s sunny! Buy your life insurance policy when you’re young and healthy, when the premiums will be much cheaper.
  • Even if you don’t work, your family will still need to replace the time you spent taking care of the house and family when you’re gone.
  • Joint policies only pay out when the first partner passes and then the policy terminates. This could leave the surviving spouse to look for a new policy to cover surviving children if something should happen later in life. Individual policies may not be that much more expensive than joint.
  • Tell the truth on your documents. The insurance company will investigate any large claims and may have grounds to deny a claim if they find out you lied.

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