Tuesday, June 19, 2007

Buying Insurance in Your Twenties

This is the second post in my series about personal finance in your twenties. Yesterday's post dealt with investing in your 20's, and tomorrow's will cover what I consider the most important personal finance topic of all: managing and developing your career in your 20's.

Last week I wrote a post about differentiating between good and bad insurance. To summarize a long post, the rule I suggested is a simple one: if you can afford to self insure, i.e. deal with the consequences of loss without suffering financial hardship, you are better off not buying insurance.

In your twenties, your biggest risks are probably health and disability. Health coverage is something everyone should have. Even if you are young and healthy, you never know what tomorrow may bring. A few years ago, a friend of mine in his early thirties, who did not have health insurance, felt some chest pain. Since he did not have coverage he decided to tough it out. He waited a few days, until finally his sister convinced him to go to the emergency room. At the emergency room doctors diagnosed him with a severe inflammation of the heart muscle and told him that if he had waited only a few more days, he would have died. Point is, my friend was a healthy young man without a history of health problems. As is, the cost of medical treatment was almost too much for him to handle. If you can't afford complete coverage, get catastrophic coverage, but make sure you get something.

For much the same reasons, disability insurance is something that you should seriously consider. There is probably few things that are more financially devastating than long term disability if you do not have the insurance to help you cope with it. This is especially true if you are unmarried and are not able to rely upon your spouse to help carry you through the crisis.

A few years ago a colleague of mine went into a consumer electronics store, Fry's Electronics, to be more specific. As she was walking in, a store employee unintentionally rammed a line of shopping carts into her. My friend hurt her back and was unable to work for several months. She had no insurance and had no other financial resources to support herself. The only solution available to her was credit card debt. Again, my friend was a healthy young woman, who found herself in a tough financial spot because she had inadequate insurance coverage.

After discussing two of the most important types of insurance you need, let's discuss some of the insurance that I consider a big waste. Let's start at the top of the list, with life insurance. The purpose of life insurance is to make sure that your dependants are financially secure if you pass away. If you are unmarried, have no kids and no dependants, forget about life insurance. If you have dependants, life insurance is one of the most important types of insurance coverage you can get.

There are many other types of insurance that you most certainly do not need, including: extended warranties, cell phone loss insurance, collision insurance for a 20 year old used car and my personal favorite: vacation insurance. I mean, if you can't take that trip to Chattanooga, just spend the week at home. There's bound to be something good on TV.

Bottom line advice: you are not invincible. Do not underestimate the risks. Insure yourself against catastrophic loss and damage, but don't pay for useless insurance or to insure minor luxuries.


Anonymous said...

I got to agree with you. It is never too early to purchase Long Term Disability. I just turned 25, got a good job that allows me to move out of my first apartment, and I want to make sure I can continue my lifestyle. That's why I got disability insurance just in case.

MasterShake13 said...

Very interesting article. As someone suffering with disabilities myself, one of the most daunting things about being diagnosed was trying to figure out how the loss of income would prevent me from keeping the lifestyle I had worked so hard to achieve. Disability Insurance for individuals is important to consider; while people always seem to remember insuring their homes and cars, they forget that if your health were to take a turn for the worse, your income would likely suffer. Though we don't know what life will throw at us next, we can be prepared for the unexpected by protecting our income!

Anonymous said...

After reading your article, I have a few questions of my own. First of all, I am 23 and have full coverage on my vehicle and am still covered by three health insurance policies thanks to my parents as well as my own job.

My first question, is it necessary to buy additional insurance if your workplace has a 60% disability benefit? I did not read the fine print of the extent of this policy, but I believe it covers disability whether in the work environment or outside causes.

Second, did your friend ever take legal action against the employee that caused her disability due to a seemingly obvious mistake of the employee's action?

Third, if you have other assets or liens, say a mortgage or car payment, would it be necessary to have some life insurance to see that they are paid off and that no debt is passed on to... whoever could be liable? I have no dependents however I do live with my girlfriend and although we have no :legal" ties I worry my debts and obligations such as our condo payment will becomes someone's problem.

Thank you for your advice!

-Erik A.