Five Types of Insurance You Must Have

When I first set up this blog, I thought about what principles I wanted to highlight as I wrote. That's how I came up with my set of five financial principles to live by. Since one of those principles is to protect your assets through insurance and estate planning, I thought sharing Bankrate's piece on the five types of insurance you must have was a natural. Here's their list:

• Life insurance
• Disability insurance
• Health insurance
• Homeowner's/renter's insurance
• Auto insurance

Here are my thoughts on these as well as some other insurance-related topics:

1. Life, disability, and health insurance are all designed to make up for the loss of your greatest financial asset in one way or another. What is that asset? Your career. Whether it's death, injury, or illness, each of these types of insurance works individually and collectively to make sure you and/or your family is covered financially in case something happens to your ability to earn a living.

2. We have life insurance on both me and my wife. Mine is to replace my income while the amount for her is to replace costs our family would incur if she passed away. These are both term policies and they expire in 15 years or so at this point -- well after the time our kids will be out of college and we should be self-insured. We're definitely in the "buy term and invest the difference" camp.

3. My company doesn't provide disability insurance, so we buy it for me. Yes, it's expensive, but the reason it costs so much is that 1) it covers a HUGE asset (your earning potential) and 2) it's much more likely to be used than life insurance is. If you don't have disability insurance, go get some -- you need it.

4. My company does have a decent health plan, so much of our medical costs are covered here.

5. Of course, we have both homeowner's and auto insurance. We tend to have high deductibles and use the insurance only for major losses -- we'd certainly self-insure for anything minor.

6. I'd add umbrella insurance to this list for most people. With the way America is today, people seem to sue at the drop of a hat. And for very little money, you can cover yourself for a $1 million or so from someone looking to score big or as extra coverage to one of the policies above. It seems like a prudent investment.

7. We still shop around and compare prices annually, but the best company for us over the past few years has been AAA. Most people don't know that they offer insurance, but they do, and offer it at a good price.

8. For some more thoughts on insurance, how to save on it, what to buy and not buy, and so on, check out my insurance category here at Free Money Finance.

Comments

[beef]

That's crazy/scary that we need all that insurance. I do agree with you but just not sure I am going to get all of it.... Funny, since I do not consider myself to be a gambler.

[Kaleb]

How do I get quotes for this "disability insurance" online?

[Minimum Wage]

Wow, so now someone earning minimum wage is supposed to tithe, pay rent, keep food on the table, keep the light, gas, and water service on, and have all that insurance too.

Reality check, anyone?

[justin]

Personal Umbrella insurance is a must for anyone with any assets.

As for people earning min. wage and covering all this insurance, there's nothing superfluous there. You drive a car you need to insure that, you rent, you need to insure your stuff. If nobody is depending on your income life insurance is not needed, healthcare costs are huge and being uninsured can knock you down extremely far. Disability insurance, if you're happy to live on nothing for months while waiting for the pittance that is SS-Disability, feel free to drop that as well.

[ted]

Everytime we think about getting life insurance, we always get caught up with term vs. universal. We always debate it and then forget about it. What made you chose term?

[Minimum Wage]

Yes, I've already had an extended uninsured illness. It's one of the reasons I'm even poorer today than I used to be.

But hey, being poor in America is expensive.

[FMF]

Ted --

See if this helps:

http://www.freemoneyfinance.com/2007/01/what_do_you_thi.html

[Evan]

I recently posted this comment on GEN-X so i'll just cut and paste it here....
"While I generally like your website and similar sites, I have to disagree with you on this one (Just to note - I am Director of Financial Planning at a Wealth management firm associated with MassMutual….also hold a J.D. - only mention this because of the estate tax impliciations)

I’ll go with the easiest rebuttle to the argument and if there are further comments I’ll chime in…

1) If your estate is worth over the $2million mark what assets are going to be liquidated to pay the HUGE (45%) Tax bill???? Is it your family home? Is it the business you strived to build? Is it the IRA which could be stretched to give your grand kids enough money where they don’t have to work? etc etc? By its very nature life insurance IS LIQUID. As such, you can pay that bill (due within 9 months of death) without liquidating anything.

As far as an argument of buy term and invest the rest - Term (in NY) ends at 80 - by statute! So you die at 81 that lovely and cheap term policy is GONE and now your family owes $X amount in taxes. Further, who is better than an insurance company to invest your money? MassMutual has a triple A rating and has been around for 150+ years - Guardian has a AA rating and has been around the same. BETTER THAN MOST STATES IN THE UNION LOL

Just a few thoughts on the subject - if there is interest by the blogger or others I will comment further!"

[FMF]

Evan --

Ok, I'll bite. Here are a few thoughts/questions:

1. The 45% tax bill is on the amount over $2 million, correct? In other words, if your net worth is $2.1 million, you owe $45,000 ($100,000 * 45%), not $945,000 ($2,100,000 * 45%.)

2. Any idea what percentage of people have over $2 million net worth when they die? I'm guessing it's small.

3. Aren't there estate planning techniques that can allow you to pass along more than $2 million without tax implications with trusts, etc.?

4. In addition, isn't it possible for someone who has, let's say $3 million, to start giving away that money/net worth prior to his death to get below $2 million before he dies?

[Evan]

I like the "I'll bite" - First, I'd like to say that I don't advocate insurance for insurance purposes, in my practice I've told people its not worth it for them, but I hate the old saying - "buy term and invest the rest" because IT IS NOT THE END ALL BE ALL OR OTHER PRODUCTS WOULDN'T EXIST! In fact I am not a huge fan of WL (it has its place) I like universal better, but onto your points/questions

1) Yes the tax is marginal - so you are 100% Correct

2) The percentage of people over $2 mil (and $3.5 as of next year) is extremely small - but not as small as one would think depending what part of the country you are from. I live in New York where the housing market is obscene, literally obscene (North Shore Nassau County). So someone with a modest home could already be starting out with a net worth of 500K to 600K without investement accounts, retirement accounts etc.

3) There are TONS of planning tools, and I utilize them on a daily basis (QPRTs, ILITs, IDITs, GRATs, GRUTs and other ridiculous quitiles - because the highest couldn't avoid it and tacronyms). But, you have to go out and USE THEM, most people don't. In fact if you look at who is actually paying estate tax it is the highest quitile and the third highest he second knew to plan while the third (sometimes referred to as "inbetweeners" i.e. upper middle class) didn't bother planning.

4) This question is part of three - a gifting strategy is one such tool. A person can give away $12K per year per body they want to give to. So if its a husband and wife and they have 4 kids with 2 grand kids - they can give away $24K to "body" or $144K a year, and get under the mark.
The problem is when they aren't cash rich and don't do the proper planning to gift pieces of property, business, etc.

I guess what I am saying that - Insurance has more of a roll then the simple protection of your income - it can protect your assets as well.

[Byron Udell]

Good post! Now's a great time to buy life insurance because rates are the lowest in history. In 1994 a 40 year old male in good health could buy a 20 year level term policy for $995 per year. Today, that same policy would only cost about $360 per year.