Ever wonder what types/amounts of insurance you need?
These days it seems like there is an insurance company offering coverage for almost anything. I receive at least one offer a week for one insurance product or another. From wedding insurance to kidnap insurance the list is endless. But which ones offer real protection and which are wastes of money? Below you’ll find a few simple steps you can take to evaluate your insurance portfolio.
Step 1: Get what you need, Get rid of everything else
Health Related Insurance- In my opinion, it makes more sense to spend your money on a good quality comprehensive health policy that covers you at home and while traveling. This will enable you to eliminate insurance that is designed to pay for very specific events, such as a specific disease or, vacation health insurance. These policies are discouraged because the circumstances needed for any of them to cover you are so specific that it is unlikely that you will ever benefit.
Life/Death Related Insurance- Instead of spending money on insurance that covers an accidental death, purchase insurance that will cover you no matter what the circumstances of death. In a vast majority of cases level term life insurance will get you the highest benefit for your money. Maintain coverage only as long as a need is present. For example, if the coverage is meant to pay off a home in the event of a spouse’s death then the coverage should be canceled when the home is paid off.
Step 2: Right-Size your coverage
In order to avoid wasting money on excess coverage, make sure that you only purchase the amount you need. For instance, when buying life insurance ten times annual income is usually a good rule of thumb.
Continue your analysis with your home to make sure that the coverage is adequate to replace it if it is damaged or destroyed. If you have an older vehicle it might make sense to carry only liability coverage on it rather than the much more expensive comprehensive collision.
Also, think about raising the deductibles on your auto and home insurance. Policies with very low deductibles are convenient but they are also quite a bit more expensive than those with higher deductibles. The money you save on monthly premiums can be used to establish a deductible fund in case you ever have to pay the higher deductible.
Step 3: Do some shopping
Use an agent that offers insurance from many different companies and get several quotes to make sure you are getting the best value possible. You can usually get significant discounts if you buy auto, home, and life insurance from one company. Last year, I added a term life insurance policy to my insurance package and the discounts I received for doing so added up to be more than the cost of the life insurance.
Step 4: Make the most of your savings
So now that you’ve freed up a little cash…how should it be used? My suggestion would be to establish an emergency fund equal to3-6 months basic living expenses. Once that is accomplished, establish a plan to use the savings to pay off any high interest debt you may have, and contribute to your 401k or other type of savings account.
These four steps may sound simple but if performed on a regular basis they could end up saving you a surprising amount. In addition, using the amount saved to pay of high interest debt or contribute to retirement savings will make the benefit compound exponentially.
If you have other ways you have found to keep from wasting money on insurance or anything else, share them with us and the rest of the Smart401k community by posting a comment here or in our member forum.
Charlie Koch, Investment Advisor
October 4th, 2009 at 4:12 pm
Do you recommend having a blanket liability policy in addition to the liability coverage of homeowner and auto insurance? If so, how much do you recommend?
What about disability coverage for those of us who work and Long Term Care coverage?
October 12th, 2009 at 6:27 pm
Dr. Bob thanks for participating in the discussion. I’ve tried to address your question below.
Blanket Liability or Umbrella Liability insurance – is meant to protect you from lawsuits resulting from a car accident or someone being injured on your property. Carrying this type of coverage can make sense, especially for higher net worth individuals. In most cases the cost is relatively low for the amount of coverage you get and adding the additional policy may trigger discounts on some of your other policies.
Disability Insurance – is also worth considering, especially if you are the sole or primary source of income for your household. Before purchasing, evaluate your emergency fund to see how long you could go without a paycheck. Set the waiting period for the policy to be just less than the time that your emergency fund would last. This will keep the cost of the policy lower than one that starts to pay out right away. Policies that use the “Own Occupation” or “Own Specialty” definition of disability will pay a benefit if you are unable to perform your job, others will not pay unless you are unable to perform any job.
Long Term Care Insurance – If you or your spouse experience health issues that require long term care, the costs could impact your nest egg significantly. Getting a policy set up in your late 40s will decrease the chances of having health issues that will raise the cost and will allow you to pay a lower premium throughout the life of the policy. The cost of care varies from one part of the country to another so be sure to buy a policy with a benefit that will cover the cost where you live and one that will adjust over time for inflation.
I hope this answers your questions. You have raised some good topics that I may cover in more detail in a future blog entry.
Charlie Koch, Investment Adviser