WHAT TYPES OF INSURANCE DO YOU NEED?

By in Insurance

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There are worse things in life than death. Have you ever spent an evening with an insurance salesman?
Woody Allen (via Brainyquote)

Insurance is one of my least favorite personal finance topics. But if you don’t have enough, your entire life can end up in the toilet.

An acquaintance, Javier, had a successful furniture business for many years. His service was exemplary and customers returned year after year. The furniture selection was fresh and modern with competitive prices. What could go wrong?

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The furniture store was decimated by fire, and it was underinsured. That means he didn’t purchase enough insurance coverage to replace what was lost in the fire. Javier saved a few bucks on the price of business insurance and lost out big time. The insurance payment wasn’t enough to reopen the furniture store.

Here’s how Javier’s lack of insurance slowly decimated his life.

First, he couldn’t reopen his business, so his income stopped.

He lost his job and source of income.

He didn’t have enough money to pay the mortgage on his beautiful home in a tony suburb. Javier lost his home to foreclosure.

Within several months Javier lost his business, his income, and his home. All the losses were due to insufficient business insurance.

Why I Don’t Like Insurance?

The terms are confusing. It’s taken me years to become comfortable with the jargon.Why not call a premium a bill? What is the difference between comprehensive and collision? Don’t get me started on life insurance or annuities. The varieties can make your head spin. For help with the incomprehensible terms visit insurance rating agency AM Best’s Glossary of Insurance Terms.

Insurance is an intangible that you buy and hope you never need. You buy it and see nothing tangible in exchange for your purchase. Not a fun or interesting purchase.

In spite of the drawbacks, experience a catastrophe and if you are uninsured, your entire life can be ruined.

Major car accident casualties without insurance leaves those poor souls with medical bills in the tens or hundreds of thousands of dollars.

What Types of Insurance do you Need?

This article gives the run down on the basic types of insurance and a brief description of each type.

Some of these types of insurance won’t be appropriate for you and you may need another related type of insurance. If you live in an apartment, you’ll want apartment insurance, not home owners. If you have no car, obviously you can forget about auto insurance. If you put a small amount down on your home, your lender might require PMI or private mortgage insurance.

In reviewing our family’s personal files I notice a preponderance of insurance. Investopedia recommends four major categories of insurance and I added the fifth, home insurance :

  • Life
  • Health
  • Disability
  • Vehicle
  • Home

 Life Insurance

“The greatest factor in having life insurance is providing for those you leave behind. This is extremely important if you have a family that is dependent on your salary to pay the bills. Industry experts suggest a life insurance policy should cover “ten times your yearly income.” This sum would provide enough money to cover existing expenses, funeral expenses and give your family a financial cushion. That cushion will help them re-group after your death.” Investopedia

Buy term life, which gives you pure insurance coverage and eliminates fancy bells and whistles and investment products bundled in. It’s affordable and you can lock in a premium rate for up to 15 years. If you have no kids or spouse and aren’t financially supporting anyone, then skip the life insurance.

Health Insurance

Health insurance is a must, yet if your employer does not cover you, it can be quite costly. Consider a high deductible policy where your premiums are lower. This type of health insurance is designed to cover those really catastrophic expenses which can ruin you financially. If you can afford to pay out of pocket for basic care, then this lower cost coverage will keep the wolves at bay if you encounter serious medical expenses.

A Harvard study on the subject found that 62% of all personal bankruptcies in the U.S. in 2007 were caused by health problems. Regardless of your political affiliation, President Obama’s efforts in this area are important for those without an employer health insurance plan.

Long Term Disability Coverage

Did you know that according to a study by the Social Security Administration, three out of ten workers will experience some sort of disability during their lifetime, keeping them from work. Those extremely high odds underscore the importance of disability coverage.  If not provided through work, keep premiums down by choosing a longer waiting period before payments kick in. Of course, this requires that you have some money saved up in an emergency fund.

Auto Insurance

Most states required auto insurance and penalize you with fines of up to $1,000.00 if you’re caught driving without insurance. That fact aside, auto accidents are frequent with 10 million accidents in 2009. Most everyone you know has been in some type of vehicle collision if they’ve been behind the wheel for awhile.

Auto insurance protects your pocketbook from the expenses of paying for your car repairs as well as those of the other parties in an accident. Medical costs are also covered. The part you pay, the deductible, is the only amount you’re responsible for in an accident as long as you are properly insured.

Homeowners and Apartment Contents Insurance

If you are an apartment dweller, consider buying insurance to cover the cost of your possession’s. Fire, theft, and natural disaster can decimate your stuff. If your belongings are worth more than a few hundred bucks, pick up a renters insurance policy.

Homeowners with a mortgage are required by the lender to carry homeowners insurance. Your home is usually your most valuable possession. Remember Javier’s sad story about losing his business in a fire. The same caution goes for your primary residence. Get adequate coverage and make sure to inventory your precious stuff so you will be adequately reimbursed in the case of loss.

Insurance Shopping Tips

  • Shop around for coverage, prices vary. Use the internet for quick price shopping.
  • Check insurance company ratings on AM Best.
  • Reduce disability insurance premiums with longer wait times and smaller replacement income payment.
  • Increase deductibles to lower premium payments.
  • Inventory your home or apartment contents in case of loss.

Much of this article was informed by Investopedia

Can’t Get Enough Insurance?

Do you have any insurance horror stories or recommendations?