Own Proper Insurance
Don’t forget homeowner’s/renters, auto, health, life, long-term disability, identity theft, and umbrella policies. Insurance is a protection plan for your assets. It can be easy to think that insurance is unnecessary; after all I’ve never had to use it, but what happens when something does happen? Have you been saving for that big car accident or for your house burning down? How will you pay medical costs, repair bills, rebuilding costs? Insurance is designed to reduce your risk and is based off of the amount of risk that you have.
Owning proper insurance will largely depend on what you own, your level of risk, what you owe, and how much you have? Take renting your home for instance. You will not need homeowner’s insurance because you do not own your home, but you do need renter’s insurance. Did you know that if something happened to the house that you are renting that your stuff is not covered by the insurance? Did you also know that you can usually get renter’s insurance for about $15 a month? Renter’s insurance is fairly inexpensive because it is only covering the stuff in the dwelling rather than the stuff in it as well as the dwelling itself.
Homeowner’s insurance is for, as the name applies, people who own a home. If you own your house outright I guess you technically are not required to have homeowner’s insurance, but again what happens if your house burns down or something major happens? Do you really want to pay for all of that out of your own pocket? If so you better make sure that you have that money set aside before you decide to drop the insurance.
Automotive insurance comes in various forms and different costs. If you are financing your vehicle then you are typically required by the financing organization to have full coverage and even GAP (Guaranteed Auto Protection) insurance if you owe more than the vehicle is worth. GAP insurance covers the gap between the value of the vehicle and the amount of the loan. When shopping for auto insurance you will hear about liability coverages, which typically covers both property and bodily injury when an accident is your fault. This covers you and all other parties involved. You will also hear about comprehensive coverage which covers against theft, damage from fires, storms, natural disasters, etc. Collision coverage, unlike liability insurance, ensures that you are covered if you are at fault in an accident. These are the basic coverages that you should consider.
Add-ons and Deductibles
There are many add on coverages to insurance policies that you will have to seek to understand and decide whether or not the expense is worth paying. Typically these coverages are rarely used, which is partly why they are fairly inexpensive, but if you add a bunch of unneeded coverages to a policy it starts to add up. Remember, that you have an emergency fund to cover many of these things so consider your need and the risk that the insurance will cover or reduce if something happens that fits the criteria of the add-on coverage.
Deductible levels will greatly influence how much each insurance policy costs you. When shopping around make sure you are comparing like policies with the same coverages and deductibles. As the deductible rises the cost of the insurance will go down. Remember that you have an emergency fund to help pay the deductible. So try to figure out how high you can reasonably go. You probably don’t want a $10,000 deductible, but you also probably don’t want a $250 deductible. Determine how much you can reasonably pay, but also look at the cost break down. If there is a very low difference in cost to have a lower deductible then the slightly lower deductible will probably be worth the extra couple of dollars a year that it costs you. The key is to be smart and to understand what you are shopping for as well as your abilities. Insurance takes on a part of our risk so we want to transfer as much risk as we can for as little as we can.
Health insurance helps to cover your medical expenses. “Medical debt contributes to nearly half of all bankruptcies in America” (Dave Ramsey.com). One way to help make medical insurance more affordable is to shop around and to consider a high-deductible plan that has a Health Savings Account (HSA) to see if it is a more realistic option for you and your family. These plans will be much more affordable and your employer may even contribute to your HSA. Another great part about having an HSA is that it is a tax-advantaged savings account for medical expenses. The funds are tax deductible, they grow tax-free, and you can withdraw them free of taxes so it’s like saving $25 on every $100 that you spend, depending on your tax rate.
Life insurance covers you upon your death. There are two main types of life insurance; term life and whole life. Term life is much more affordable because it covers you for a term such as: 10, 20, 30 years, etc. Whole life insurance is much more expensive but does have some features you may be interested in. If you are serious about following the steps of financial FREEDOM then you should be able to eventually self-insure if you so chose to. The purpose of life insurance is to help provide for your family upon your death, it is NOT an inheritance (though many people treat it as one). If you don’t have a spouse or kids you don’t really need life insurance unless you want it for some reason. If you do though you want them to be taken care of.
What do I mean by self-insured? If you determine you need $500,000 of insurance to cover your family upon your death, then you could self-insure and drop the life insurance when you reach that much or when you are close to it. Remember our goal is to reduce expenditures in your life and start building wealth so that you can take care of your family and leave an inheritance to your children’s children. With the low costs of term life insurance you may go a long time before you are unwilling to pay the premium. After all if a policy only costs you $300 a year why would you want to drop it, even if you are able to self-insure yourself, but if the policy will cost you $5,000 a year it may not be worth it, you will have to decide.
Long-term disability insurance will cover you if you are unable to work for a long period of time. It will provide you with a portion of your income if you are unable to work. Check with your employer about long-term disability insurance because it will be cheaper if they offer it. When looking at long-term disability insurance try to cover about 65% of your income and pay attention to the elimination period. The elimination period will determine how long you must wait to get paid after it has been determined that you are unable to work, disabled. Your emergency fund will help to cover the gap until the elimination period has been reached.
Identity theft insurance won’t help you determine who you are, but it will protect you if your identity is stolen by someone else. Look for identity theft insurance that will completely restore your identity and the adverse effects that the theft had on your identity, will proactively monitor your accounts to reduce your risk of becoming a victim, and that will not only cover the costs associated with the fraud but will also cover the expenses associated with taking care of the issue.
Lastly, an umbrella policy will add extra protection for you and your assets. This will cover you if you are liable for a multi-vehicle accident and will kick in once your auto policy is maxed out. It will also help protect your assets as you continue to build wealth. It provides an extra layer of protection for bodily injury, property damage, liability, and even should you be sued. For the low cost an umbrella policy is a must as you increase your net worth.
There are many different insurance policies available on the market today and these are the main ones that you should consider. Remember that you should shop around to ensure you are getting the best rate and the best deal, but make sure you are comparing like policies. Also remember to consider a higher deductible and have them run some different deductible costs so that you can figure out how much more risk you are willing to take on or transfer. Lastly, stick to the basics. There are tons of add on insurance items that you will likely never need. They are nice to have when you do need them, but if you stick with the basics outlined here you should be covered in most situations should anything happen. Just remember that when you are shopping for insurance it is to transfer the amount of risk that you are willing to take on. If you know that you have a substantial amount of risk in an area and the insurance coverage is reasonably inexpensive then you may decide that you would rather transfer that risk onto the insurance company.
Note: This is by no means an exhaustive explanation about insurance or even about the types talked about within this article. Always make sure that you understand what it is that you are purchasing and why you want it or need it. If you do not understand something then ask questions and if you are not satisfied with the answer ask more questions or go somewhere else.