How do you decide what type of insurance to carry, and how much?
In order to answer this question, it’s probably necessary to first identify the purpose of insurance. As I understand it, the purpose of insurance is to protect against catastrophic events resulting in costs that you (or your loved ones) could not afford to pay on your own. Perhaps some would define it differently, and no doubt there are varying opinions about what constitutes catastrophe and what is considered “affordable.”
To some extent, I see the insurance industry as purely a middle-class phenomenon. Poor people can’t afford to buy insurance, and rich people don’t really need insurance because they can cover pretty much any expense without it. However, as a member of the middle-class, I feel a responsibility to take prudent measures to protect the resources with which God has blessed me. However, sometimes it’s not clear when insurance ceases to be protection, and becomes a bet that’s not in your favor. Let’s look at some common types of insurance and evaluate the necessity of each.
Purpose: Pay for medical bills related to sickness and/or injury.
Given the high cost of medical care, most people would be devastated if they contracted a critical disease, were in a serious accident, or were plagued by ongoing illness. Therefore, some type of health insurance is a good idea. My employer provides a good plan and pays for a large portion of it, so I don’t have any reservations about this one.
Purpose: Pay for damaged property and/or medical bills related to an automobile accident, and/or miscellaneous damages to your own vehicle.
Every state that I know of requires liability insurance in order to drive legally, and most people could not afford to pay the bodily injury costs if they caused an accident, or the property damage if they run into someone’s Rolls Royce. Collision and Comprehensive is where it gets a little fuzzy; there comes a point where they just aren’t worth it. There’s no sense in paying for collision and comprehensive on a rusty old beater. Where do you draw the line though? Right now I carry both collision and comprehensive on my car and motorcycle. Once I’m comfortable on my bike, I’ll probably drop the collision and comprehensive on it, because if something happened to it, it would not be catastrophic. Even on my car, it would put a big hole in my savings if I totalled it, but I could still afford to replace it without insurance.
Purpose: Pay for property damage related to natural disasters.
Banks require home insurance in order to give you a mortgage, but even if you own your home outright, most people don’t have enough cash to replace their home if it were destroyed, so home insurance is a worthwhile means of protection.
Purpose: Pay for burial expenses when someone dies, and provide living expenses for survivor(s)
Since I’m not married, I don’t have any additional life insurance beyond what is provided to me at no cost through my employer. When (if?) I do get married, I don’t see the point in a large policy. My goal is to save enough so that my family is cared for without needing to rely on life insurance. A reasonable term-life policy can provide a cushion until adequate savings are available.
Long-term Disability Insurance
Purpose: Provide continued income in the case of a long-term disability.
This is one that I don’t currently have, but I’m thinking I probably should add. The income we make over a lifetime is much, much more than the $20,000 car or $100,000 house that we insure. It makes some sense to insure our livelihood against a disability that would prevent us from working.
Long-term Care Insurance
Purpose: Pay for in-home nursing care, assisted living, or nursing home.
Most recommendations I’ve seen advise against long-term care insurance until you’re closer to retirement age, and then it depends your current financial state.
Accidental Death Insurance
Purpose: Like life insurance, but only pays in the event death is caused by an accident.
Most recommendations I’ve seen advise against paying for accidental death insurance. Regular life insurance is sufficient.
Other types of insurance:
Travel insurance, credit insurance, etc.
What other types of insurance have people tried to sell you, and should they be considered?