The thought of spending your hard earned money to purchase insurance is usually not a pleasant one. It is generally something you hope you will never need. But unfortunately living life responsibly necessitates risk management by purchasing several types of insurance. You may think you are buying an intangible item that doesn’t give you any immediate benefit.
Insurance may never pay off a claim or benefit in many instances. But the real and immediate benefit you get from insurance is peace of mind. You need it to protect yourself, your family, and your assets. It is a tool to help you avoid financial hardship should the unexpected occur.
Insurance Is Used To Minimize The Impact of Unfortunate Events
Insurance is used to manage various risks you may face as you live life. Examples include premature death or disability, illness or injury, accidents, and damage to property. However, you often have the option to retain such risks.
This means that you choose not to take action to transfer at least part of such risks. For example, you may decide not to purchase life insurance. You therefore maintain the risk that your family may face financial difficulty should you die prematurely.
You can also reduce risks by taking certain actions. For example, with the risk of premature death, you can avoid dangerous activities. But this does not eliminate the risk.
Sometimes you can take action to eliminate risks. For example, if you do not own a boat, you do not have to worry about related damage or liability. You would therefore not need boat insurance.
However, in many cases, it is not possible or feasible to eliminate certain risks. If you cannot eliminate a risk, you must either retain it or transfer it. Purchasing an insurance policy is the most common way of transferring all or part of a risk that you face.
Life insurance may be the least favorite type of insurance you want to think about. No one wants to think about the possibility or eventuality of their own death. However, it may also be one of the most important types of insurance you can buy if you have a family who depend on you. Yes, you can eat healthy and exercise. You don’t smoke, and you avoid dangerous hobbies.
Granted all this reduces your chances of premature death. Not to mention the potential for lowering your premiums. But you can never eliminate the risk of death. It can be something genetic, an accident, or some other mishap. Sometimes things happen that you just cannot control or prepare for. You just never know.
And because you never know, you cannot afford to risk your family’s financial well being. Consider how your children and spouse would fare without the income you currently provide. Besides the current living expenses, what about the plans you have for the future? They may not be able to adequately save for college, and your spouse may not be able to retire comfortably.
Life insurance can also be used to pay off estate debts. This can allow you to pass assets to your heirs debt free. If you have a high net worth, the insurance proceeds can also be used to pay estate taxes. This way, your heirs won’t be forced to liquidate inherited assets to pay debts and taxes of your estate. So these are definitely some of the things you want to consider before passing on purchasing life insurance.
Sometimes you can have life insurance through your employer. However, the amount of such policies is often not nearly enough to cover the insured’s needs for protecting their dependents.
Similar to life insurance, long-term disability insurance is another must have type of policy. It is essential in establishing your financial safety net. You need it to provide an income source in the event an accident or illness incapacitates you. As with life insurance, you must think about any dependents you may have and how they will get by without your income.
But unlike life insurance, disability insurance may be necessary even if you do not have dependents. You may need it just to help you pay your own bills. It can allow you to pay your mortgage, car loans, and other bills.
Social Security Disability Insurance (SSDI) can also be an option. But it is generally harder to qualify for this government benefit. Also, the amount of coverage may not be sufficient to meet your needs.
Property and Casualty (P&C) Insurance
Life and disability insurance can help you keep your property if your income is not available. The payouts allow you to service any debt and pay for maintenance and repairs. Property insurance serves a different purpose. What if a fire destroyed your home? Even if you are alive, well, and working, such a loss can create financial hardship if you do not have a homeowners insurance policy.
Few people have the financial means to deal with such damage. Not to mention other types of emotional issues and stress that come with losing a home. A property and casualty policy can help you to repair or replace the damaged property. The same concept can apply to other property such as a car or boat. If the property gets damaged, you can repair it with an insurance claim. As long as the cause of the damage is covered by your policy.
Another aspect of property and casualty insurance is the liability coverage. If someone gets injured on your property, a resulting lawsuit can be devastating. Similarly, a car accident can result in property damage and other liability claims from others injured in the incident. This is why auto insurance is mandated in practically every state. The liability coverage can help you deal with such events without causing a severe impact to your financial situation.
You May Not Have A Choice
When you have a mortgage on your home, you don’t have a choice in whether or not you should purchase home insurance. But even if not required, it is wise to cover your home. It is usually very affordable for the protection you get.
With auto insurance, you really don’t have a choice. It doesn’t matter if your car is old or new, or if it leased or fully paid. You are generally mandated by state law to carry a minimum amount of auto insurance. However, some parts like collision insurance may be optional if you own your car outright.
Take Action to Reduce Risk and Lower Premiums
As with life insurance, there are actions you can take to minimize risk and reduce your premiums. With home insurance, you can install an alarm, fire sprinklers, and smoke detectors. You can also refrain from smoking and having dangerous pets in the house. With auto insurance, you can avoid texting while driving. Also, don’t drive if you are tired or intoxicated. You can also take safe driving courses to reduce your premiums.
Deductibles are another way to lower premiums. A deductible is the dollar amount for which you are responsible before the insurance company pays a claim. With a deductible, you are essentially keeping a part of the risk for the event you are insuring against. The amount of the deductible can vary.
The higher the deductible, the lower the premium will be, and vice versa. It is okay to have a deductible so that you can lower your premiums. But be sure you can afford the deductible. You don’t want it to put you in a financial tailspin even though you have insurance.
For example, let’s say your deductible on your home insurance is $1,500. A tree falls on your home and the resulting damage is $8,000. You will be responsible for the first $1,500, and the insurance company will pay the remaining $6,500. If the damage was only $1,000, you would be responsible for the entire amount.
An unexpected illness or injury can result in the need for immediate and extended medical care. Most individuals cannot afford the cost of such care without proper health insurance. Large unexpected medical bills can leave you in dire financial straits. As with life insurance, you can reduce risk and premiums by taking care of yourself and avoiding hazardous activities. But also similarly, the risk cannot be eliminated.
Many employees obtain insurance for themselves and their family through their employer. This is often a good deal for a couple of reasons. First, the premiums for group plans are generally lower, and more importantly subsidized by the employer. Second, you pay for your portion, if any, on a pretax basis. This allows you to get a tax benefit for paying your premiums more easily than if you paid them on your own.
However, not everyone has the opportunity to obtain health care from an employer. You may be unemployed, self-employed, or under-employed. But nonetheless, you must obtain insurance on your own if you cannot obtain coverage any other way.
As with property and casualty insurance, deductibles can reduce your premiums. Just make sure they are not more than what you can comfortably handle.
Monitor Your Insurance Coverage Requirements
Your insurance coverage requirements may change over time due to various life events. Examples include marriage, the birth of a child, divorce, purchasing or selling a home, etc. The birth of a child will necessitate different life insurance coverage than when your children are older and no longer depend on you financially. Alternatively, you may put an addition on your home. This may require an increase in coverage on your home policy.
Insurers may also change coverage, premiums, and terms of the policy over time. As such, you want to review your policies at least annually to make sure you have the proper and necessary coverage. Also pay attention to what other insurers are offering. For example, you may be able to switch your auto or home policy if you find a better deal elsewhere.
Insurance Types That You Probably Don’t Need
Only buy insurance for the risks that will cause financial hardship if they were to occur. For example, losing your home in a fire can cause some serious problems. But insuring a pet or inexpensive material items is not necessary. You can probably handle such a loss without the need for financial assistance from an insurance policy.
Also, don’t buy overlapping or redundant insurance. For example, you can buy insurance for specific diseases such as cancer. You can also buy mortgage or credit card life insurance. But these extra policies are generally not necessary.
For example, if you have good life, disability, and health insurance, these other insurance types may be redundant. Not to mention that they are much more narrow in scope. They only insure against individual very specific items such as a mortgage or a credit card balance. Finally, such niche policies may be more expensive for the coverage you get.
However, if you cannot obtain life, disability, or health insurance for whatever reason, such policies may make sense if you can obtain them. They may also make sense if say you are retired and no longer have a need for life insurance.
But you may own a home that you want to pass on to your family tax free. If that is your only objective, then something like mortgage life insurance may make sense. Keep in mind though that it may be more difficult to acquire as you get older. Also, the proceeds from such policy payouts go directly to the creditor, as opposed to beneficiaries that you name.
So purchasing various types of life insurance may not be your ideal way to spend your money. But the peace of mind and security provided may be more than worth the premiums. Yes, purchasing different types of insurance can be daunting and expensive. But you can take preventive measures to minimize premiums. You can also shop around and compare prices and policies.
Finally, you also want to review your policies and personal situation on a regular basis. Your insurer may change policy coverage, terms, etc. Further, marriage, divorce, child birth, and other life events can change your insurance requirements. Click here for more wise money tips.