Monday, November 17, 2008

Insurance You Need, Insurance You Don't

The post I wrote last week about reducing your car insurance bill got me thinking about other kinds of insurance, and how useful they are. As I have written before, insurance should be reserved for potentially devastating costs - as a way to reduce your risk to manageable levels. If the risk is something you can handle without a third party (who makes money by charging you more in premiums than they pay-out in claims), you should handle that risk on your own.

With that in mind here are some of the types of insurance that I think are well worth the money:

Life Insurance - that's a big one. If you die, you want to make sure that your loved ones are well taken care of. However, even here it is important to understand that if you don't have dependents, you probably don't need life insurance.

Disability Insurance - possibly even more important than life insurance (although, I must admit I only have the inadequate coverage offered by my employer). You want to make sure that if you are unable to continue doing your job, you are still able to maintain a decent standard of living.

Home Insurance - unless you are a multi-millionaire (and I mean MULTI), losing your home to a fire or hurricane without insurance could completely devastate your financials.

Health Insurance - if your employer does not offer health insurance, you should make every effort to buy your own. If you can't afford a complete plan, at least get catastrophic coverage with a large deductible, to make sure that you have some backing in case of a major illness.

Car Insurance - we can argue about collision damage, but making sure that you have enough liability coverage is key. Getting sued for all you are worth by someone injured in a collision with you is really something you want to avoid...

There are many other types of good insurance, but the important thing is to understand that what they all have in common is this: they protect you from risks that while relatively small, would devastate you financially if you don't have sufficient coverage.

Now, let's talk about some types of insurance that are useless in my opinion:

Extended Warranties - every time I buy anything at Best Buy, the sales clerks try to convince me to get an extended warranty. But why? Very simply: the company makes money on the policies they sell. Conversely, the cost of the insurance is higher than what they expect to pay me in repair costs. I don't know about you, but if my iPod dies, I don't expect to be devastated financially. Worst case scenario, I'll need to live without portable music for a while.

Life Insurance for Children - your kids do not need life insurance. No one is depending on them for income (unless your child happens to be a famous movie star or fashion model, I guess). If the unthinkable happened and your child passed away, your income would not be effected. In fact, although it is sad to say, your expenses would actually go down. The risk here is not financial, it is emotional, and that cannot be off-set by life insurance.

Vision Coverage - if your employer did not provide vision coverage, would you get it yourself? I wouldn't. Again, the same logic applies: your vision coverage covers the cost of your annual exams and purchasing prescription glasses and such. Most people would probably be better off foregoing the insurance and buying the glasses on their own. Remember - the insurance company needs to make money, so they are charging you more than they expect to pay for your check-ups and prescriptions.

Vacation Insurance - unless we are talking about your dream vacation that you have been saving for for the past decade, insuring your vacation makes very little sense to me. If your vacation gets cancelled for some unforeseen reason, worst case scenario, you get no vacation that year. You are not financially devastated. Your life continues along its normal course.

Again, there are many other types of insurance that do not make economic sense, the common denominator is that even if the worst case scenario occurs, your financial condition is largely unchanged. In such cases, it is best to save your money rather than spending it on buying unimportant coverage.

You can also check out my previous article about buying insurance in your 20's.


Traciatim said...

The only one I don't agree with is the life insurance on kids. I know the general rule is that if you don't have dependents you don't need life insurance as much, but I can't fathom losing one of my kids, taking my three days of bereavement, and getting back to life as usual.

I'm a firm believer that your kids should have insurance equal to one years expenses + funeral expenses. This would allow for a proper funeral, and some time to reflect on what you want to do with your life if you need it. If it doesn't hit you as hard as you thought you could donate the cash to a charity in their name, or set up an education fund for remaining children . . . or anything. At least the option is available.

Mr. ToughMoneyLove said...

If you are in your 50's or older, long term care insurance is something to strongly consider.

Shadox said...

Traciatim - your logic makes sense and it fits into the framework I am suggesting. You are describing a situation in which the loss of a child would have unbearable financial consequences in addition to the emotional loss. If that is the case, insurance is clearly required by the criteria I am proposing.

Mr. Toughmoneylove - absolutely. Long term care insurance is certainly something that needs to be considered since its cost can be dramatic.

Ren said...

I certainly agree with the general thrust of your post, but I think a bit of emphasis should be place on not needing as much health insurance as most people end up choosing when their employer offers a choice.

Also, I've heard (though never done it myself) that it can be worthwhile to buy (3rd party) trip insurance when taking a cruise. The cruise lines are supposedly unwilling to accept any excuse for being unable to attend and the insurance can apparently be had fairly inexpensively.

This probably comes down to how big a deal the cruise/vacation is to you. You point out that all you lose is the vacation, but if you've saved up for several years for that vacation, then that is still a big deal.

jessie said...

In today's times planning ahead and taking care of your future needs is so important. Come to think of it. If you were to die could your family or dependants, pay for your funeral, organize the financial affairs, service pre-existing debt and continue their current standard of living without you? Think of it....before its too late....