This week’s FPU lesson was all about understanding and choosing insurance. This one was pretty advanced for me and was a lot of information to soak up in an hour period. And I must admit, it’s not a fun topic. Who wants to talk about Life Insurance!? But, I’ve seen the effects of not having these things in order and it’s worth the unpleasant discussion to make sure everything is in place for the unthinkable. So I try to make it business, and not personal. That helps. 
Dave’s first point is that insurance exists to transfer risk. I think we’re all pretty well aware of that. But what’s the best way? Well, that really depends on your situation. He recommends these basic types of coverage for everyone:
- Renter’s or Homeowner’s Insurance
- Auto insurance
- Health Insurance
- Disability Insurance
- Long-Term Care Insurance
- Identity Theft Protection
- Life Insurance
He recommends raising your deductible for Homeowner’s, Auto, and Health Insurance if you have a fully funded emergency fund (3-6 months of living expenses). And he says to make sure your policy is a “guaranteed replacement cost” and not and “extended replacement cost.” Guaranteed replacement says that if you insure your house when it’s worth $200,000 and it is destroyed a few years later when it’s worth $350,000, then you get $350,00 for it instead of $200,000. Or, if you can’t get that sort of policy, then review your policy each year to make sure it’s up to date.
Then he discusses HSA’s. I haven’t heard of these until recently, but they may be a really good idea for those of you who rarely go to the doctor. You can read more about them here. He recommends disability insurance in the situation that you are not able to work. I never really thought about this one, but he convinced me that it’s a good idea. He talked about how even housewives need this because if something happens with them, someone’s going to need to pick up the slack. Whether you’re hiring a maid or eating out more often, that loss will be felt financially.
As far as life insurance goes, he recommends term life insurance for young couples with kids. It’s cheaper and in 30 years, your kids should be grown and out of the house, your debt should be paid off, and you’ll be self-insured.
The big thing I learned was not to purchase duplicate coverage. He goes on to explain that if you have health insurance from two places they often argue back and forth about which is the primary coverage. It turns out that sometimes it can work out worse if you have double coverage.
There are lots of types of insurance out there and I know it’s difficult to learn the best kinds to purchase – that’s why this lesson was so helpful. Ask yourself questions about the coverage you already have to determine if you really need it. And get a will and the proper insurance for the assets you have.
Do you have all these affairs in order?
{ 2 comments… read them below or add one }
The thing about insurance is that it transfers the risk away from you. I agree completely.
But when you “self-insure” yourself, how does that work? Who are you transferring the risk to in that situation? I don’t believe in “self-insurance.” You’re either insured or you’re not.
I wholeheartedly believe having life insurance your entire life. It’s a matter of when, not if, we die. We may want to leave an inheritance to our children, donate to a charity or church that has made an impact in our lives, or pay off all of our debts to avoid any unnecessary burdens upon our deaths.
Kristine,
I think the whole “Self-insurance” is based on having the wealth and will, etc in place, so when you die, you can cover your own cost of burial and still have an inheritance for whoever you choose.
But I am still hesitant myself to say I don’t want insurance. But maybe it’s because I haven’t been at the point in my life where I can take that step. Things might look different to me in 30 years.