Words of Advice on Selected Insurance and Risk Management Topics

The following is an excerpt from Securing Your Financial Future: Complete Personal Finance for Beginners courtesy of Rowman & Littlefield Publishers. All Rights Reserved.

A list of brief tips on some of the most common categories of insurance appears below, plus a few important items from the broader field of risk management. These are brief, so think of them as broad guidelines, not ironclad rules. You’ll need to do lots more research on your own. Above all, keep in mind that these comments are specifically intended for a typical person in the 1st third of their financial life. If you’re not in the 1st third—or if you’re not typical when it comes to that subject—then consider the advice with caution.

1.  Health insurance. People early in their financial life are famous for letting their right brains have complete and utter control of their health insurance decisions. Why? The choices are complicated, the costs are high, and the prospect of future illness or injury is unpleasant. Right-brain reaction: “I am young and healthy; in fact I’m downright indestructible. I don’t need any health or medical insurance, or else just the bare minimum.” Bad idea! Tell your right brain to have a seat and engage your left brain in truly understanding what your choices are. You are taking a big and unnecessary risk if you don’t. If you want to save on premiums, go with very high deductibles, not with big gaps in coverage. And keep yourself healthy!

2.  Homeowner’s and renter’s insurance. Whether you rent or own, you need it. And keep the list of valuables that you’re insuring current; if you don’t, you’re not getting the value for your premiums that you think you are.

3.  Car insurance. Car insurance is broken down into several subcategories. Each state requires that you your car in that state. The specific requirements vary from state to state, but the basic idea is that if you cause an accident, you must have insurance to cover people that you injure or cars that you damage. But there is no requirement that forces you to cover injuries to yourself or damage to your own car in an accident that you cause. Here is the point: of course, you will carry whatever types of car insurance your state requires, but it is a big mistake if that’s the only car insurance that you carry. You’ll want yourself and your passengers, as well as your car, to be covered in the event of an accident. You’ll also want your car to be covered if it is damaged in any other way not related to an accident (vandalism, storm damage, hit while parked, etc.). Save money by having high deductibles but not by skipping entire categories of coverage. And of course, drive safely!

4.  Life insurance.  Life insurance comes in two types: term and permanent. Here’s the recommendation: you want term life insurance, not permanent. Permanent life insurance comes in many varieties; some of the more common types are whole, universal, and variable. But whatever names they go by, all forms of permanent life insurance have a long-term investment aspect. In part IV, we’re going to discuss a completely different—and much superior—long-term investment strategy, so you’re not interested in any of the permanent insurance– related investments.

Even though your choice is term life insurance, you only need it during a very specific time during your financial life. That time begins as soon as you have any financial dependents, so don’t buy any life insurance at all before then. The time for term life insurance ends when your net worth becomes large enough that you can provide for these dependents through the provisions in your will, or as soon as your dependents are no longer dependent on you. As soon as you meet either condition, don’t renew your term life insurance policy when the current term expires.

5.  Private mortgage insurance (PMI). If you buy a house, you’ll probably be required to pay for this type of insurance if you pay less than 20% down. This isn’t good news, because even though you pay the premiums, the insurance is for the benefit of your lender, not you. But as you’ll learn in part III, you will pay 20% or more down, so you won’t need PMI.

6. Long-term care (LTC) insurance.  This type of insurance is increasingly advertised, so you may be curious about it. But LTC doesn’t make sense to consider in the 1st third of your financial life; you can ignore it at least until your late 40s. (If you are financially responsible for someone who is one or two generations older, though, you may need to investigate it.)

7.  Wills. A will isn’t insurance, but you can think of one as part of your overall risk-management strategy. You don’t need a will if you have no dependents or if your net worth is less than $100,000. But as soon as you meet either of these conditions, you do need a will, no matter your age or health. Don’t put it off—it’s a must. Unless your situation is unusually complicated, you can do it yourself inexpensively.

8.  Living trusts. These are often brought up along with wills. But it’s unlikely that you’ll need one in the 1st third of your financial life. Living trusts are important once your net worth becomes large (say, over $1 million), or if there is something unusually complex about your assets or about the way you want to distribute them after your death.

9.  Living wills. Despite the similarity in names, a living will is completely different from a living trust, or a standard will, but a living will is very important in its own right. A living will allows you to express your wishes in advance, in the event that you become incapacitated and unable to communicate them for yourself. In particular, you can advise health-care professionals whether you do, or don’t, want your life extended through artificial means if your chances for recovery are very limited or none. Yes, it is a grim prospect to think about, and it can evoke very strong feelings all around. But in the absence of a living will, you may be putting your loved ones, and/or the medical professionals caring for you in a very difficult position. Most people haven’t spent much time thinking about this, but when they do, they come to the conclusion that filing a living will is a simple and inexpensive precaution that potentially can save a lot of heartache. The laws concerning living wills vary from state to state. I highly encourage you to at least investigate this in your own state and then decide for yourself.

Comments

[Jim]

Lots of good advice here.

One point I'd make an exception to is for car insurance you do not need comprehensive coverage on your own car if the car isn't worth that much.

[Chris Smith]

Thanks, Jim - and I agree. If your car is in the "beater" class, it's fine to skip the comprehensive. Anything above that, though, and I'd recommend the small amount that it would take to add high-deductible comprehensive. By the way, no shame in driving a beater - I certainly did at one point! A beater bought with cash in full, up front is a more beautiful car than ANYTHING requiring financing!

[DENICE LORRAINE]

Good article. There are so many mortgage insurance providers out there. I am shopping for quite some time, but having hard time finding out the right one. Found from bankrate that reliance first capital gives good discounts. Will it be good in the long run? Any thoughts?

[Chris Smith]

Hi Denice, and thanks! As noted above, I'm a pretty big believer in paying at least 20% down, even if the lender will allow a smaller down payment. When you do, then you can avoid having to pay ANY private mortgage insurance. That's what you want to do if you can, because PMI is completely for the benefit of the lender, even though YOU are the one paying the premium. But that's not the only reason for a down payment of 20% or more - the bigger the down payment, the more protection you have in case the housing market gets even softer. (Most think we've reached the bottom already, but it's no sure thing - and local markets can always be exceptions to whatever's going on nationally.) Hope that helps, if not - post again with a few more details!