Finances & Money

Fixing your money mistakes: Be sure to insure

Continuing my discussion of 5 common money mistakes, we’ve already discussed creating a budget and saving for emergencies and retirement. Now, we’ll talk about something only Actuaries care about: Insurance

Types of Insurance

Excluding the really weird types of insurance like insuring your armpit if you’re a professional deodorant sampler, you still have a wide range of choices to wade through such as:

• Homeowner and Renter insurance
• Auto insurance
• Flood, Fire, Wind and other catastrophe insurance
• Life insurance
• Disability insurance (short- and long-term)
• Health insurance

How to choose the right insurance for you

When I was fresh out of college, I was clueless about insurance. My employer had great benefits, and I ended up overbuying on some and underbuying on others.

For example, I was a young, healthy male with little or no history of chronic illness to worry about. I had a few options for health insurance that ranged from $50 per month for a relatively low deductible, 80% reimbursement PPO to about $100 per month for a no-deductible, no-copay, 100% reimbursement HMO. I chose the HMO and ended up paying double of what I needed because I didn’t choose to inform myself about my risks, probabilities and requirements.

Another example is when I had to choose life insurance. I came out of college with about $75,000 in debt (student loans, shiny new car, credit cards). I wasn’t married, so my parents would have been responsible for my debts had I died prematurely. Do you think I bought enough term life insurance to cover my debt? No. I chose what my employer offered by default, which at the time was about $25,000 in term life. You may know from my past articles that my family is in no shape to pay for their own debts, much less mine.

There’s no clear-cut amount of insurance that you should buy, because everyone has a different life situation. A few factors that will affect your insurance purchase decision include:

• Do you have children or other dependents? Obviously you wouldn’t want to leave your family in peril if you are the sole or majority breadwinner and you become disabled or die prematurely (is there such a thing as dying prematurely though?).
• Do you have stuff? That’s a very broad question, but if you have stuff, you’ll probably want to insure it. You don’t want your life’s possessions to be lost in a fire, flood, burglary or other catastrophe and be left with nothing. At least you could have some money to buy a new home or rebuild, refurnish your home, or replace your business equipment.
• Do you have a history of chronic illness in your family? Certain medical problems can hit any time, such as Crohn’s or colitis, heart attack, diabetes, and cancer. If you know you have a high probability of getting hit with a chronic illness, don’t wait until you have it to try to get insurance!

Tips for Buying Insurance

Just from my own experience, as well as reading 100 personal finance sites daily, here are a few tips to help you buy insurance:

1. Buy Term Life, not Whole Life insurance. Term is MUCH cheaper than whole life, but it does expire. If only we knew this when we bought our own whole life policies a few years ago, we wouldn’t be spending hundreds per month in premiums!
2. STOP SMOKING NOW! If you want a sure-fire way to get charged more or even denied for insurance, then smoke.
3. If you’re obese, LOSE WEIGHT NOW! Just as with smokers, insurers don’t want to get stuck with your expensive insurance bills when you get heart disease or diabetes. I know I need to lose about 30-40 lbs to be considered healthy, and it’s hard, but I’d rather not get a preventable disease if I can help it.
4. Before applying for auto insurance, check your driving record. In Maryland, we can order our driving record for $9 online. I get to see most of what the insurer gets to see, and I’ll know my chances of lower rates before applying.
5. Be honest. Don’t lie about your medical history, driving record, or whatever else you’re asked on an insurance application. You’ll be committing something called “insurance fraud“.
6. Assess your financial requirements closely before making a decision. Just as I didn’t think to buy enough life insurance to cover my debt, you don’t want to underbuy or overbuy insurance. If your car is worth $1000, then why would you keep anything but your state’s coverage requirements (usually just Liability)? If you have 5 young kids and a $1 million home, then why wouldn’t you have over $2 million in coverage?

Future articles will cover each type of insurance in more detail. For now, think about reviewing all of your insurance policies, and consider policies you don’t currently own but need.

Be sure to insure!

Be sure to check out the rest of the series Fixing Your Money Mistakes:

1. Create a Budge
2. Save, Save, Save
3. Be Sure to Insure
4. Research, Wait, Repeat
5. Don’t Fall for those Scams