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Often I hear people say, “Insurance is a scam” or, “It’s too expensive.” But I’ve never heard anyone complain about insurance when they’ve needed it.
Some types of insurance are required. Banks require you to purchase homeowners insurance when you buy a home, for example, in order to protect their loan and make sure they get paid. But some types of insurance are voluntary. Nobody is forcing you to purchase policies that protect your income or assets, or that ensure your funeral expenses will be taken care of.
Let’s take a look at a few of these voluntary policies and highlight key points you should know:
Types of insurance
If anything should happen to you that physically keeps you from earning a living — such as an accident or serious illness — you want something that protects your income.
Depending on the size of your employer, you may have disability insurance from work, but I’ve found it’s usually not enough, especially if you’re early in your working life. A typical employer plan would replace 60% of your income if you’re disabled. If you’re living paycheck to paycheck and you lose that paycheck for any length of time, 60% likely won’t be enough for you and your family to live comfortably.
Most supplemental policies will allow you to get an additional 20% to 30%, for a total coverage of 80% to 90% of your income. Supplemental policies have the additional advantage of being tax-free.
Property and casualty insurance
This is a category of insurance that covers such things as your house, auto, boat and RV as well as personal liability arising from lawsuits and other claims. It’s also where many people try to save a few dollars by purchasing the minimum coverage.
The potential danger of doing so is the risk of incurring more liability. If you’re the victim of a hit-and-run accident, it’s your insurance that will pay for damages and any medical bills. If you have the minimum coverage, it may not be enough to cover everything.
The same is true if you’re at fault and you get sued. A personal liability umbrella policy provides coverage beyond that of your auto and home insurance policies, and it helps pay any judgments as well as defense costs. Best of all, they’re not expensive policies. They often start at a minimum of $1 million in liability coverage.
In my opinion, life insurance is the easiest solution to making sure your funeral expenses are covered. I recommend a small whole life insurance policy rather than a term life policy. Term life policies are generally better for most life insurance purposes, but they don’t work for funeral expenses because term life plans have a set finishing date and can run out before you pass away. I believe a $25,000 to $50,000 whole life insurance policy is sufficient to offset inflation and cover expenses of a basic funeral.
Ways to save — not skimp
There are a few things you can do to save money while keeping adequate coverage. Insurance companies have different underwriting requirements, and you may be able to find lower rates without changing your coverage by shopping around. Or you can lower your rate by increasing your deductible, which is the amount you pay before the insurance company kicks in. If you go that route, however, you’ll want to think clearly about how many claims you might make in a year to make sure you don’t end up paying more. And ideally you’d make sure the amount you pay out of pocket comes from your emergency fund and doesn’t impact your other savings.
In my opinion, talking to a professional is the best route to take when deciding on the best insurance coverage. Insurance agents or fee-only financial advisors will ask questions designed to get you to think, and they’ll help you determine the best mix of insurance and self-funding for your situation.
Not getting coverage or dialing it back to save a few bucks a month can lead to surprise and disappointment when an unforeseen event occurs and you’re not able to recover financially. Make sure you educate yourself on what’s available and how you can best protect your assets.