There are few financial topics as important as insurance. Without adequate coverage, years of building wealth can be wiped out in an instant. Conversely, paying too much for coverage, or paying for coverage you don't need, can be like throwing your hard earned money to the wind.
Insurance is not fun to purchase. When you pay to buy a home, college education or a shiny new car, you get something tangible for your money. Insurance is the opposite. You hand over cash in hopes that you never need to use it. In order to get your money's worth, you have to have your property stolen or damaged, get sick or injured or die. Not fun! But those very same devastating life events are exactly why you have to have insurance. Insurance provides the ability to weather financial storms. In today's world, there is an insurance policy for everything. But not everything needs to be insured.
What Types of Insurance You Need
There are some insurance policies a savvy consumer should never live without. These policies are ones that are needed to protect you, your family and the necessities of life.
Medical Insurance: Without your health, you have no means to earn money. For that reason medical insurance is a must. A basic hospital stay for a non-life threatening illness can run in the thousands of dollars and bankrupt a consumer. Those with medical coverage are more likely to schedule annual well checks and take advantage of preventive health measures that can avoid future health issues. Those without coverage subject themselves to financial devastation in the face of accidents or unexpected illness.
Homeowners Insurance: For most people, if you have a mortgage, homeowners insurance is mandatory. Oftentimes the premium is built directly into the mortgage payment. Because for many Americans their home is their greatest asset, it is important to protect it. If you rent, renters insurance can fulfill the same purpose. Even if you don't own the dwelling, your belongings can add up to a considerable sum to replace in the event of theft, fire or other unforeseen circumstances.
Auto Insurance: Another type of insurance coverage that is usually required by law is basic auto insurance. Depending on your policy, auto insurance can help repair or replace an automobile if damaged. More than that, it can cover the injury or death of another person when the policy owner is at fault. Though basic coverage is required, the reach of what it can cover is determined by the purchaser.
Life Insurance: If you are married, have children or others who depend on you, life insurance covers the loss of income that your loved ones may count on for survival. The amount of insurance needed depends on each individual's life situation. At the very least you want to have enough to cover funeral expenses and any outstanding debts. If you have a young family, or are in the prime of your earning years, more insurance may be needed to supplement the loss of your income that family may depend on to live.
What Additional Types of Insurance Are Recommended?
Depending on your personal circumstance, there are other types of insurance coverage that may be advisable in order to help you weather any unexpected life events.
Disability Insurance: It is likely that almost every worker will face some kind of disability at some point in their work lives. Whether through injury, surgery or illness, it is good to be prepared for time out of work. If you are not one of those people with a substantial amount of money in an emergency fund, it is highly recommended you purchase disability insurance. If you are fortunate enough to have some kind of disability coverage through your employer, check to see if it is short- or long-term coverage and what percentage of your income it covers. If you are barely making it by on 100 percent of your salary, and your company offers coverage for 60 percent of your income, supplementing this coverage may be a wise investment.
Umbrella/Liability Insurance: Umbrella insurance adds additional coverage to your homeowners and auto policies. This higher protection helps you in the event that you are sued or legally held liable for any injury due to deemed negligence. The more wealth you have, the more vulnerable you are.
Long-term Care Insurance: Any financial planner would be remiss if they did not present their clients with the benefits of long-term care insurance. Because it is expensive, it is hard to insist that everyone make this a mandatory part of their financial portfolio. Because Medicare and health insurance does not pay for long-term care expenses, these expenses will be paid by the patient until all their wealth is exhausted and they then qualify for Medicaid. In the case of couples, one person's care can financially devastate the healthier partner. Everyone should weigh the risk carefully. The question is not whether you can afford it, but rather could you afford not to.
Insurance You Don't Need
There are some insurance policies that play on your emotions, or focus on covering items not necessary to your survival. Avoid wasting your money on these.
Pet Insurance: With all of the restrictions, pet insurance seldom pays off. It is better to budget money annually for your pet's healthcare and visit the vet annually to avoid any surprises later down the road.
Extended Warranties for Electronics: Oftentimes a sales representative makes a larger commission on the sale of warranty than they do on the object itself. Enough said.
Credit Card Insurance: It is far better not to run up your cards to the point where you ever have to worry about the bill. Even with large balances, a small term insurance policy for the amount of the balance or utilizing your disability insurance from work is a far less expensive option.
Cell Phone Insurance: The average plan costs $5 to $7 dollars a month with deductibles of $25 to $199 dollars. It makes more sense to save the money and hang on to old phones when you upgrade. This allows you a phone to reactivate in the event your phone is lost, stolen or damaged.
Child Life Insurance: Life insurance is to provide for heirs or dependents. Seeing this does not apply, you are better off putting the money you would pay for premiums into an educational account.
Private Mortgage Insurance: Because PMI protects the lender against loss when lending, there is no benefit for the homeowner. You are literally throwing away the money paid to PMI each month and often also have to pay for an appraisal to have it removed. It makes far more sense to take your time and save the 20 percent down money required to avoid PMI. An additional benefit is that your interest rate will probably be lower as well.
Collision Insurance: If you are not carrying a note on your car or if your car is older, dropping collision could save you a lot on your auto insurance. Particularly if you have money saved and the means to purchase a new car. Consider whether the amount you would be paid if an old car was totaled is worth the price for carrying collision.
Car Rental Insurance: Many auto insurance policies already cover car rentals. Check your policy to avoid paying twice.
ID-Theft Insurance: Because of federal consumer-protection laws, you shouldn't have to pay to protect your identity. If you are a victim of ID theft, refer to information from the Federal Trade Commissions' ID theft policy at www.ftc.gov/.
Flight Insurance: If you were to die in a plane crash, your beneficiaries would receive a set insurance benefit. This is not necessary if you already have an adequate amount of life coverage.
Insurance is one of the most important tools to financial stability. The purpose of insurance is to protect your body, your property, possessions or loved ones and heirs in the event of sickness, accident or death. In today's marketplace there is an insurance policy for everything, but only a few that you truly need. Be a smart consumer. If the insurance doesn't protect you in the most devastating situations, it is probably not worth your money.
Cindy Diccianni is a certified long term consultant, a registered investment advisor and a registered representative with Leigh Baldwin & Company member FINRA and SIPC. She is the principal of Argus Financial Group, Inc. You can contact her at www.TheArgusFinancialGroup.com or cindy@TheArgusFinancialGroup.com. Jeanne Lawson is Client Manager with Argus Financial Group Inc.