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The kinds of insurance you do, and don't, need.

by Keith Rawlinson
Volunteer Budget Counselor

Note: I am a budget counselor, not an attorney, insurance salesman or insurance expert.  Everything contained in this article is nothing more than my opinion and is meant only to supplement what you learn while doing your own research on the matter. When it comes to insurance, always do your own research and make your own decisions.  Never do anything just because you were told to by me, a salesman or anyone else for that matter.  Always do further research and draw your own conclusions.

With so many different kinds of insurance available, which offer an overwhelming number of different coverages, how do you know what kinds of insurance you do and don't need?  Well, there are some types of insurance that just about every American should have and there are some types of insurance that are most often a waste of money.  Below are the major kinds of insurance which fit into these two categories.  Understand that I am not an insurance salesman nor an insurance expert and the information provided in this article is nothing more than my opinion on the matter.  Do further research before making any decisions regarding insurance and make sure that before canceling any kind of insurance, you have something else already in place to replace that coverage.

Always remember that what an insurance salesman tells you means nothing--the only thing that matters is what is given to you in writing!

The kinds of insurance you do need...

Health Insurance

The first kind of insurance that pretty much everyone should try to have is health insurance.  A trip to the hospital emergency room can run $300 to $3,000 or more pretty quickly.  Surgeries costing hundreds of thousands of dollars are not uncommon and a serious medical problem requiring a lengthy hospital stay can run into the millions of dollars!  One of the leading causes of bankruptcy in the United States today is overwhelming medical bills.  It is not a matter of if you are going to need medical care, it is a matter of when.  You can do everything right with your finances such as getting out of debt, building up savings, and investing for the future; and have one serious medical problem wipe out your savings and destroy your finances.  Everyone needs health coverage of some kind.

If you can get decent health coverage through your employer, that is usually the least expensive way to go.  If you have to buy your own health insurance, shop around.  There are many different policies available.  An HSA (Health Savings Account) might be an option if you don't have many medical problems and rarely go to see a health care professional.  Health policies with a high deductible tend to be the least expensive if you have few medical problems.  Also look into prescription drug coverage as well since medications can get very expensive very quickly.

Always remember that what an insurance salesman tells you means nothing--the only thing that matters is what is given to you in writing!

Home Owner's Insurance

A house in generally the most valuable thing that most Americans will ever own, so it makes sense that it needs to be protected.  If you have a house but can't afford home owner's insurance, then you can't afford the house--you would be better off renting a place to live.  The problem here is that most people think it can't happen to them.  Well, it can and does happen and it can happen to anyone.  If you have no insurance and your house burns down, you not only lose the house, but you also lose everything that was in the house.  You basically have to start your life all over with just the clothes on your back and a huge mortgage you still owe for a house that no longer exists. It's just too much risk to take.  If you have a house, then you need to have home owner's insurance.

If you do have insurance, make sure you reevaluate it every couple of years to make sure your coverage is still adequate.  If you have a $100,000 house and $20,000 worth of belongings in that house, then $120,000 worth of insurance coverage is all right.  But, if over the years, the value of your house and belongings has increased to say $150,000 and you have $100,000 in coverage, you will have to come up with the extra $50,000 yourself.  If you have antiques, collectibles, firearms or expensive electronics, you need to make sure your policy is adequate to cover those items in the event of a catastrophe.  Generally, it is best to have "replacement value" coverage.  That means that in the event of a loss, the insurance company pays you what it costs to replace what was lost instead of just paying you the current, depreciated value.

Also, check to see what kinds of catastrophes your home owner's insurance covers.  For example, many people don't realize, until it's too late, that flood is not usually covered by a standard policy.  To have your home covered for flood, you have to add a flood insurance rider to your regular home owner's policy.

Once you are debt free, have a three to six months emergency savings, and maybe even have the house paid off:  think about increasing your home owner's liability coverage.  Sadly, once you own expensive things like a house or car on which there is no debt, and have a large amount of cash, you become a target for a lawsuit.  In this case, you would want your liability coverage to be no less than $500,000.  For people who are debt free, I also recommend a one million dollar umbrella liability policy.  You would be surprised how little this much coverage actually costs, and it gives you $1,000,000 worth of coverage for virtually ANY negligent act you might do which results in a lawsuit.

Once you have home owner's insurance, make sure you ask your insurance agent what kind of discounts are available.  Generally, your premiums will be reduced for such things as deadbolt locks, security system, smoke detectors, fire extinguisher, security lighting, etc.  You won't know if you don't ask.  Also, once your emergency savings is in place, you might want to consider having the deductible raised.  The deductible is the amount you have to pay out of your own pocket before the insurance company pays.  The higher the deductible, the lower your premiums.  Just make sure you have enough money set aside to cover the deductible before you raise it; and  make sure that any money you set aside for any kind of insurance deductible is in addition to your three to six months of emergency savings.

If you are a renter, then buy renter's insurance.  It is unbelievably inexpensive and covers all of your belongings in case there is a catastrophe.  Be warned that the landlord's insurance does not cover what you own, only what the landlord owns.  In other words:  your stuff is not covered by the landlord's insurance.

Always remember that what an insurance salesman tells you means nothing--the only thing that matters is what is given to you in writing!

Car Insurance

If you drive, you've got to have some kind of car insurance.  At the very least, make sure you have liability insurance--the more liability insurance you can afford, the better.  If the car itself is not covered, you only lose the value of the car; but, if you injure or kill someone, the lawsuit could cost you millions of dollars.  If your car is worth around $2,000 or more, then also try to have collision coverage.  If you don't have coverage for the car itself and the car is destroyed, it will be up to you to come up with the money for the next one.  If your car is worth less than about $2,000 then by the time you subtract out the deductible, you are paying a lot of money for very little actual coverage.  If your car is worth less than $2,000 then save up $1,500 to $2,000 and use that to cover the car in case of an accident and don't bother paying for insurance to cover the value of the car itself.  If you can afford to cover more than $2,000 in the event something happens to your car, then you can go ahead and drop the collision coverage if you wish.  Just make sure that you could replace the car out-of-pocket without borrowing any money.  And, as I already said, liability insurance is pretty much a must.

Be aware that the insurance company generally only pays you what the car is worth, not what you still owe on it.  Since cars depreciate so fast, you usually end up owing more on the car loan than the car is actually worth--this is called being 'upside down' on the loan.  For example:  if you bought a $23,000 car three years ago, it is probably worth somewhere around $11,000 and you may still owe $13,000 on it.  If the car is destroyed and you have coverage, the insurance company will only pay you the $11,000 that the car is actually worth, not the $13,000 you owe on it.  The $13,000 you owe minus the $11,000 the insurance company pays leaves you with $2,000 you still have to pay on a car that no longer exists.  If you figure in your deductible, the situations is actually a bit worse.  Some insurance companies do sell 'gap insurance' to cover this difference, but it is expensive and you are far better off just having a big enough down payment so that your loan amount is less than, or equal to, the value of the car.  Even better would be to buy a car the right way in the first place so you don't even have to worry about the payments.

I know of a case where someone bought a brand new car right off of the dealer's lot.  Well, as soon as a brand new car leaves the lot, the car depreciates somewhere around 15%.  The guy signed the loan papers, got his keys, drove his $30,000 car off the lot, pulled out in front of someone, and totaled his brand new car!  Since the car had lost that 15%, the car was only worth $25,500 which is about what the insurance company paid him.  The guy was left making $4,500 worth of payments for a car that didn't even exist anymore!

As with home owner's insurance, Save up some money to use in case of an accident, then look into raising your car insurance deductible.  Your premiums should be less and you will usually come out ahead in the long run.  Just make sure that any money you set aside for any kind of insurance deductible is in addition to your three to six months of emergency savings.

Always remember that what an insurance salesman tells you means nothing--the only thing that matters is what is given to you in writing!

Life Insurance

When it comes to life insurance, the biggest mistake people make is not understanding what the purpose of life insurance really is.  The purpose of life insurance is to allow your family to continue in the same lifestyle if you were to die.  The purpose of life insurance is not to get rich, and is not to invest for the future--it is to replace what you materially contribute to supporting your family.  If you provide any necessary income or services to your family, you need life insurance.  By this I mean that if your family counts on your income, or on the things you do around the house, to survive then you need life insurance.

Now that you understand the purpose of life insurance, it is my opinion that if you possibly can, you should try to avoid whole life, universal life, or any other kind of life insurance that builds up a cash value.  The way cash value insurance works is that you pay for the insurance premium plus some extra money which goes to build up a cash value or provide a paid-up policy sometime in the future.  The problem is that the return on this cash value is terrible and quite often you don't even start building up any cash value at all until quite a while after you've been paying on the policy.  Also, by the time the insurance company takes out fees and percentages, the interest you earn on your so-called cash value is less than you could earn in a good Growth Stock Mutual Fund.  Besides, if you die, your family doesn't generally get the insurance payout and the cash value--they only get the payout--the insurance company just keeps your cash value!  There are some life insurance policies out there that say you get both the payout and the cash value in the event of death; however, what they don't always tell you is that there is an additional fee for this 'privilege,' or that your insurance payments are jacked up to cover it.  It takes a very long time for any cash value to build up to much, and the return on your investment is awful.  That is why, if you can possibly do so, I recommend that you get a 15 year, 20 year or longer Term Life Insurance policy and then do the things you learn here on the Financial Page so you will eventually get to the point where you won't even need to have life insurance to protect your family.  Don't fall for the salesman's pitch; cash value life insurance is horrible.

Let's say that you can get the Term Life coverage you need for $40 per month.  Let's say that the cash-value policy costs $90 per month but builds up cash value.  With the cash-value policy $40 is going for insurance and the other $50 is going toward your cash value.  At the end of 15 years, your cash value may have built up to somewhere around $10,000 if you're lucky (excluding taxes).  Of course if you die during that 15 years, the insurance company keeps the cash value and your family only gets the payout amount.  

Let's say that instead of buying the so-called cash value policy, you buy the Term policy for $40 per month and just invest that extra $50 per month in a good Growth Stock Mutual Fund.  At the end of 15 years, your $50 per month has grown to somewhere around $20,000  or twice as much as in your cash-value policy.  Plus, if you die during that 15 years, that Mutual Fund still belongs to your family and they still get the life insurance payout.  Why in the world would you invest your money at a lower return just because some insurance salesman said so?  Be warned that the reasoning the insurance salesman gives you will sound really good and will seem to make a lot of sense; but, that's because the salesman either doesn't understand their own product or they have left out a lot of information they don't want you to know.  Don't fall for it--get a 15 year, 20 year or longer Term policy.  If you already have a cash-value policy, first get a Term policy fully in place, then you can cancel your cash-value policy if you wish.  If there is actually any cash-value, just invest that in a good Growth Stock Mutual Fund along with whatever you are saving in premiums.  If you are uninsurable for any reason, or the Term policy will cost as much as your current cash-value policy for the same coverage, then just keep what you have.  Cash-value insurance is still better than no insurance.

Now let's talk about how much life insurance you need.  If you contribute significantly to the annual income of your family, then the payout amount (or face value) of your life insurance policy should be about ten times your annual income.  In other words, if you make $50,000 per year then you would multiply that by ten:  

$50,000 X 10 = $500,000

So, you would need a life insurance policy with a $500,000 payout upon your death.  If you are a non-wage-earning spouse, then half of that amount will probably be enough.  In the case of a wage-earning spouse, the life insurance money is invested in a good Growth Stock Mutual Fund which historically pay about 10% per year on average.  10% of $500,000 is $50,000.  Thus, in our example, the wage-earner's income has been replaced by living off the earnings from the mutual fund.

In the event of the death of a non-wage-earning spouse, the money earned in the Mutual Fund would go to pay for daycare, child care, a nanny, private school, a maid, etc.  Thus, some of the stress of losing a spouse and parent is reduced.  Of course money can't replace a loved one, but trying to deal with the death of a loved one is much, much worse when there are financial troubles on top of it.

If your family is counting on your income to survive, and if you can afford life insurance, then not having it is totally irresponsible and you are putting your family at a terrible risk.  If you can't afford Term insurance of ten times your income, then get a Term Life Insurance policy for as high a payout as you can afford.  Any life insurance is better than nothing.

Then, some day in the future when you are out of debt, your house is paid off, you have three to six months worth of savings, and your investments are worth as much as your life insurance payout, then you can drop the life insurance since you don't need it anymore.  That is actually the ultimate goal--to get to the point that you no longer need life insurance to protect your family.  When that time comes, you can just put what you were paying in life insurance premiums into your Mutual Fund.

If for health reasons, or any other reasons, you can't qualify for a term life insurance policy, then is is all right to get or keep a cash value policy.  Any life insurance is generally better than no life insurance at all.  Always make sure all new insurance policies are fully in place before canceling old ones.

To shop for Term Life Insurance, I strongly recommend starting with Zander Insurance.

Always remember that what an insurance salesman tells you
means nothing--the only thing that matters is what is given to you in writing!

Disability Insurance

At any given time in your life, you are much more likely to become disabled than you are to die.  Injury, health problems and disability are the number one cause of home foreclosures in America today.  If you become disabled and can't work; your income stops and you are in serious financial trouble.  If your family is counting on your income to survive, then you need long-term disability insurance.

There are a lot of companies out there selling short-term disability insurance.  This is not the kind of disability insurance you want--you need long-term disability insurance.  Short-term insurance may cover you for a few months to maybe even a year or two...but then what?  You are still in financial trouble, it just hits you later.  With long-term coverage, you are covered for ten or twenty years or more!  The problem isn't just put off until later--it is solved!  That is why you want long-term disability insurance instead of short term.

Try to get enough coverage to provide at least 70% to 80% of your take-home pay and get that coverage for as long as you can afford.  Some policies will even cover you until retirement age.  Don't count on Social Security, PERS or any government coverage.  You can't necessarily count on those programs to still be in place when you need them, but your disability policy doesn't change.

To shop for Long-term Disability Insurance, I recommend starting with Zander Insurance.

Always remember that what an insurance salesman tells you
means nothing--the only thing that matters is what is given to you in writing!

The kinds of insurance you generally don't  need...

Cash Value Life Insurance

As I have already explained above under "Life Insurance", cash-value life insurance such as Whole Life, Universal Life, etc. is, in my opinion, a very bad deal.  You are overpaying for life insurance coverage and investing your 'cash value' in a very poor investment.  Somehow, the salesmen manage to make it sound like a good idea, but it isn't.  The reason insurance people push the cash value life insurance so intensely is because they either truly don't understand how bad of a product they are selling, because it is the highest profit and commission for them, or both.  If it is available to you, Term Life is usually the best deal for life insurance.  In my opinion, you should never buy a cash value policy if you have a choice.

If for health reasons, or any other reasons, you can't qualify for a term life insurance policy, then is is all right to get or keep a cash value policy.  Any life insurance is generally better than no life insurance at all.  Always make sure all new insurance policies are fully in place before canceling old ones.

Always remember that what an insurance salesman tells you means nothing--the only thing that matters is what is given to you in writing!

Cancer Insurance

The reason cancer insurance is pushed by the insurance industry is because there is only a small chance that they will ever have to pay off; so, nearly all of the premium you pay is profit for them.  The salesman will tell you all sorts of frightening things about cancer to try to scare you into buying it, so beware.  According to the research I have done, you only have around a 15% chance of developing a serious, life-threatening cancer and dying from it over your lifetime.  Look at it this way:  if you have cancer insurance, there is an 85% chance that the insurance company will never have to pay you anything.  Now is there a chance that you will be one of those 15% who do develop a serious cancer?  Yes, but statistically you have that 85% chance that you won't.  And even if you do, how big of a difference is that cancer coverage really gong to make?  Remember that I have already suggested that everyone have health coverage of some kind?  Well, that health insurance covers cancer as well.  What little extra a cancer policy pays usually doesn't really make that big of a difference.

Now, if you have a consistent family history of cancer, and you can get the insurance, then maybe cancer insurance will pay off and maybe you should go ahead and get it; but, just because the cancer insurance might pay off doesn't necessarily mean it is needed or is a good idea.

OK, generally cancer insurance is really cheap.  It's cheap because the insurance company knows that they probably will never have to pay you anything.  But nonetheless, it is cheap.  So, if having cancer insurance really makes you feel better emotionally and if you can afford the extra money, then go ahead and get cancer insurance.  I'm not saying that having cancer insurance is going to mess up your finances--I'm just saying that cancer insurance is, for the most part, an insurance you statistically won't need.

Always remember that what an insurance salesman tells you means nothing--the only thing that matters is what is given to you in writing!

Life Insurance On Children (possibly)

Of all the people you know and ever meet, how many do you know of who have had a child die before the age of 21 other than from suicide or war which are not covered by insurance anyway?  For the average American it won't be many.  That is because it is a statistically unlikely event.  That is why the insurance companies try to guilt you into getting life insurance on your children--because the insurance company knows that they are unlikely to ever have to pay you so all that money you pay them is pretty much pure profit!

Remember I told you that the purpose of life insurance is to protect a material contribution to the family.  So, unless your child is earning a significant amount of money on which your family depends, there is no need for life insurance on a child.  The only other time you might possibly want insurance on a child is if you don't have the six or seven thousand dollars it could cost in funeral expenses if they were to die.  Of course once you are debt free and have all of your emergency savings in place, you can drop any life insurance you do have on a child since you could take care of any funeral expenses yourself.

Think of it this way:  if you buy life insurance and your child lives past the age of 21 (which statistically he will,)  then the insurance company gets to keep all of the money you paid over the years.  If, however, you just get out of debt and save up so you don't need insurance on a child, then after the child reaches 21 years of age, you can spend the money you would have paid for insurance, use it for the child's education or give it to them as a wedding gift.

If you do decide to carry life insurance on a child anyway, then do it by adding a rider to your own life insurance policy instead of by taking out a separate policy on your child.  Stay away from promotional children's life insurance from baby food companies, toy companies, infant care products, etc.

Always remember that what an insurance salesman tells you means nothing--the only thing that matters is what is given to you in writing!

Extended Warranty

I include this category because an extended warranty is a type of insurance.  You generally only make one payment, usually at the time of purchase, but it is still insurance.  Extended warranties are a great idea--for the company selling them--not for you!  Companies that sell extended warranties make a fortune on them.  

Here's how an extended warranty works:
You buy a product, usually an expensive one, and the sales clerk asks if you want to buy an extended warranty so that your purchase will be repaired or replaced if something should happen to it.  Sometimes, they scare you by telling you all of the things that might go wrong and what it would cost to fix them.  The scare tactic works and you buy the extended warranty.  Sometimes, amazingly, extended warranties are even offered on relatively inexpensive items!  Why?  Because the profit is so  high for the company that sells you the extended warranty.

Trust me, the company selling you the extended warranty is not doing it to help you--they are doing it to make a profit.  This means that the company has to figure out what things are the most likely to go wrong with your product and what it would cost, on average, to repair those things.  The company then adds a little money on top of that for their profit.  If you never need your extended warranty, then all the money becomes their profit.  The catch is that you are not likely to ever need the extended warranty the company is talking you into buying.  When you buy a product these days, especially a fairly expensive item, it comes with a manufacturer's warranty that lasts usually from 90 days to two years.  The extended warranty usually extends that warranty to three years.  If you think about it, of all the products you've ever bought that ended up having a problem, it generally happened either during the manufacturer's warranty, or after you've had the product for three years or longer.  Do you see what that means?  It means that you are buying a warranty for a period of time during which it is likely that nothing will go wrong with your product!  The company selling you the extended warranty knows this and that is how they end up making so much money--you pay for something you seldom if ever use.

Besides, in order for the company selling you the extended warranty to make a profit, they have to charge you for what the average repairs would cost, plus something for their profit.  That means that if you just paid for repairs yourself, over time, you would save the money that creates their profit.  So, instead of buying an extended warranty, just take the money they are trying to charge you for the warranty and put that money right into the bank and never touch it.  If you do ever end up needing a repair that would have been covered by that extended warranty, you take out some of the money and pay for the repair.  Over time, the money you put away in this manner will add up to more than your repairs cost and you get to keep the extra money yourself.  You make the profit instead of the company who tried to sell you the extended warranty.  Now, of course it is possible that you don't buy the extended warranty and the item you bought explodes the day after the manufacturer's warranty expires, but this doesn't happen very often and over time you will come out ahead not buying extended warranties.

What about extended warranties on really expensive items like digital televisions, appliances or even cars?  Well, the same logic we just used still applies and over time you will still come out ahead by not buying extended warranties even on expensive items.

When it comes to extended warranties, just as with any other kind of insurance, what the salesman says means nothing--only what is given to you in writing matters.  I say this because I had an interesting experience one time which supported my belief that extended warranties are a bad idea.  Years ago, I purchased something from Radio Shack and they tried to sell me an extended warranty.  The clerk actually told me that the item would be repaired or replaced if "anything" happened to it.  He even told me it would be covered if it were run over by a car or dropped.  I found that level of protection a little difficult to believe, so I asked him for a written copy of the extended warranty agreement.  He actually refused and said that I would receive one after I purchased the extended warranty.  After having an insistent conversation with the store manager, I was given a written copy of the extended warranty--all five pages of it!  I took the next couple of days to look it over and saw that it specifically excludes (does not cover) abuse, neglect or accident.  Exactly the opposite of what the store clerk told me!  I few days later I was in that same Radio Shack store for some other item and heard a different clerk telling another customer the same lies I had been told.  As I said, all that matters is what is in writing.

Here's another example of extended warranty 'gotchas': Years and years ago, before I knew better, I bought a brand new car and got the extended warranty.  Even in writing, the agreement said that the timing belt was covered.  Well, the fan belt ended up breaking and flying up underneath the timing cover where it took out the timing belt.  So, since the timing belt was a covered part, I took the car in.  After the repair, I was presented with a bill for $300 (a lot of money at the time).  When I told them that the timing belt was covered by my extended warranty, the clerk told me that the timing belt didn't fail.  The fan belt was what failed.  Therefore, a part that was not under warranty failed and took out a part that would have been under warranty if that part had failed on its own.  I checked the agreement and sure enough, in the fine print it said that covered parts which are damaged by non-covered parts were not covered.  So much for my warranty.

The lesson here?  Never buy an extended warranty.  Instead, have an emergency savings built up and put the money the extended warranty would have cost right into the bank.  It's so ingrained in me now, that when I'm in a store and hear the words "extended warranty,"  the words "no thank you" automatically come out of my mouth.

Always remember that what an insurance salesman tells you means nothing--the only thing that matters is what is given to you in writing!

Insurance on anything that you could afford to cover yourself.

This one speaks for itself.  If you are out of debt and have a nice emergency savings built up, then don't buy insurance on things when you could afford to take the hit and pay it yourself without depleting your savings excessively.  This can apply to a lot of things like vacation insurance, wedding insurance, rain-out insurance, etc.  If you can afford the cost if something goes wrong, then don't pay someone else to cover it for you.  Over time, you will come out ahead.  You may lose a few times, but you will win considerably more times than you will lose.

And let me repeat it one more time just in case anyone missed it...
Always remember that what an insurance salesman tells you means nothing--the only thing that matters is what is given to you in writing!

Please know that all of the thoughts, information, suggestions and techniques given on this site are nothing more than the author's opinion on the matter being addressed.  Do further research before making any decisions.

This article copyright 2007 by Keith C. Rawlinson (Eclecticsite.com).  All rights reserved.
This article may be copied for non-profit use including newsletters, bulletins, etc. as long as you
first get written permission from the author and 
full credit is given which includes the author's name
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