This week is “In The Event Of An Emergency” week. We're looking at things you can do to plan ahead for life's emergencies, both big and small. The first post in the series looked at why you should have a safe deposit box or fire safe, and what you should be putting in it. The second post looked at why you should put all of your important personal and financial information in one spot, and how to do back it up and keep it safe.
Today I want to look at a topic that is usually thought of as being boring, but is nonetheless an extremely important one.
Why Do I Need Insurance?
Paying for insurance is one of those things that none of us likes doing, especially when things are going well and we don't feel like we need it. However, have just one health issue or car accident, and you'll be glad that you're paying for the insurance.
Paying for insurance is important because it transfers the monetary risk of a catastrophic event from you the insured, to the insurance company. The insurance company banks on the fact that most people aren't going to have a major event in any given period, and in fact, most people don't. Because of that insurance companies make a lot of money. On the other hand, if you do have a major event, you'll be extremely glad you've been paying those premiums. The insurance is your umbrella for your rainy day.
At our house we were blessed to have good health insurance last year when my wife found that she had a extremely dangerous blood clot in her left leg. Her entire leg clotted up, and she ended up in the hospital for almost a month. After all of her surgeries and treatments our total medical bill was in excess of $250,000. Because we had insurance we ended up only paying for about $2500 of that! Without it we would most certainly have had to declare bankruptcy. (read our story here)
I had a co-worker who's wife got into a car accident. She also had almost $250,000 in medical debt, except that they had no insurance at the time she was in the wreck. Because they hadn't been insured, they ended up having to declare bankruptcy.
What Types Of Insurance Should I Have?
What types of insurance you carry is really up to you, your personal financial situation, and whether you're secure enough to self-insure. If you're not to that point yet, here are some of the most important types of insurance to have:
- health insurance
- life insurance
- homeowner’s insurance
- auto insurance
- disability insurance
- long term care insurance
Let's look a little more in-depth at each kind of insurance below.
Health insurance is something that everyone needs to buy, in my opinion. The risks of having an expensive major health issue are just too great to ignore. If you don’t believe me, just look at the stats. Medical bills are the number one cause of bankruptcy! I've seen that stat bear out in my own personal experience, where we avoided bankruptcy by having good health insurance, and my co-worker filed bankruptcy because he wasn't covered and couldn't pay his bills. (When paying your hospital bills, don't forget to ask for a discount!)
Health insurance can be extremely expensive, but not having coverage can be even more expensive, so take that into account.
If your employer has good group health insurance coverage provided, and even pays part of the costs, take advantage of that plan. You'll almost always get a good group discount, and end up paying less than if you found coverage on your own.
If you're looking to save costs and you're relatively healthy, another option that people can look intois Health Savings Accounts (HSAs). HSAs offer a lower premium and higher deductible, and allow you to save and spend money on health care related expenses tax free.
If you don't have insurance, and you'd like to get some quotes to see what your options are, I recommend checking out eHealth Insurance. The site will give you multiple quotes on coverage with your choice of hundreds of different plans.
Having life insurance isn't something that you do for yourself. It's something you set up to ensure that the loved ones you leave behind are provided for when you're gone. Only two things in life are guaranteed, death and taxes. We know when our taxes are due, but we never know when our time on this earth is done.
Having life insurance allows you to plan for the sad scenario that you may not be around to help provide for your family during your prime earning years.
How much insurance should you have? A good rule of thumb is to have 8-10 times your annual salary in good 20 year term life insurance. So if you're making 50,000 a year, get a policy for $500,000.
Remember when buying policy that term life insurance is almost always a better idea than whole life or cash value insurance policies. Life insurance policies don't make good investment vehicles. Invest outside of your life insurance, and buy term life. It costs a whole lot less, and you can save or invest the difference.
You never know when a disaster will strike and you'll need good coverage. The fire we had in our neighborhood last week goes to show that disasters can pop up out of nowhere, a single careless act can cause an entire area to burn to the ground. Many in California can attest to the dangers of wildfires. Other areas have different risks like earthquakes or hurricanes. Make sure you're insured against the risks in your area, and that you're not underinsured.
Buy good homeowner's insurance with guaranteed replacement cost, a policy in which if something happened to your home everything would be replaced no matter what it cost. Many companies did away with those types of policies a few years ago, so don't automatically assume that you already have it. Many policies will only cover the cost of the home/possessions when you bought it, plus a maximum of 25%. If your home grows in value more than that, you're out of luck! Make sure you're covered!
Also get the liability coverage added to your policy, up to even $500,000, it's usually cheap for the coverage you're getting. When people sue you for something that happened in your home, you can be sure it won't be for just $100,000.
You're usually required to have auto insurance, so this one should pretty much be a no brainer. Just make sure that you're shopping around for the best rates, and that you're covered for the things you think you're covered for. Raise your deductibles to save some money, and if the car is older consider dropping collision coverage and just keeping liability. If you've had insurance for a while, try shopping around to lower your auto insurance costs.
Once you get enough assets, you may want to get an umbrella insurance policy to cover you above and beyond the coverage amounts on your auto insurance. You can have an accident and easily have $500,000 in medical bills for the other party, which your insurance may not cover all of. Once again, insurance can prevent that financial catastrophe.
Would you be able to continue providing for your family if you were to have an accident or be otherwise disabled? Disability Insurance is designed to replace income that is lost due to a short-term or permanent disability. Having this type of insurance is usually a good idea. If your workplace offers disability as a part of your employment, even at a reduced rate – you may want to consider it.
When buying your disability insurance, buy it for 65% of your current income, and buy the policy with after tax dollars so your disability income isn't taxed on the other end.
Long Term Care Insurance
Long Term Care Insurance is a good idea if you are 60 or older. Any younger and you probably don’t even need to consider it just yet. After 60, it’s important because almost 7 out of 10 people over the age of 65 will require long term care at some point in their lives.
Are You Covered?
Those are a few of the most important types of insurance that you should probably consider purchasing. Having all of that coverage does carry a price tag, and it won't be cheap. But remember, buying insurance is like buying that umbrella for a rainy day. You may not know when it will come, but for most people it DOES come. Plan ahead, and have that umbrella ready.
Do you think having all of these types of insurance is a good idea? Are there other types of insurance you think people should have? What are your thoughts on the topic? Let us know in the comments!