PhilMur's thoughts on biz/tech/money/life

I often find it interesting to encounter young, single individuals who support no one other than themselves holding large life insurance policies.  Equally as baffling is to encounter wealthy, older people paying exorbitant insurance premiums on their relatively expensive foreign automobiles.  Most of the time, individuals in either of these scenarios are simply over-insured.

Of course, many professionals would say that the problem of not having sufficient insurance is much more widespread.

So, I have attempted to create a chart here that lays out WHAT insurance most people need and WHEN in their lives they will need it, and I will further explain the rationale behind holding each type of insurance below the chart.  Note that this information is not a substitute for professional advice based on your particular situation, but rather for informational purposes only.

TYPICAL INSURANCE NEEDS ORGANIZED BY LIFE STAGE

Automobile Collision Insurance: Most people think of automobile insurance as “automatic”–something they will get and must get if they own and drive a vehicle.  That IS true in almost every state when it comes to liability coverage, which covers costs related to other individuals’ involved in an accident that is determined to be your fault.  You definitely want to maintain liability insurance, as lawsuits and other issues could drive up claim amounts to high levels unpredictably.  However, collision insurance is designed to cover damage to YOUR vehicle when you are at fault in an accident, and is not actually required in most states.  If you own a vehicle outright, and have no loan you owe money on, you can very likely opt NOT to have collision coverage.  This makes sense to do if you can stomach potentially writing a check for the full cost of a replacement vehicle in the unfortunate event you cause an accident that totals your car.  Many people in their 50′s, 60′s and beyond self-insurance all automobile incidents, as they have sufficient wealth to cover such incidents without it drastically affecting their assets or lifestyle, and they know they will very likely spend less over the years than by paying collision insurance premiums year after year– particularly if they have historically been a safe driver.

Health Insurance: Regardless of where you stand on this hot-button issue philosophically and politically, the fact remains that if you are able to hold health insurance, you should do so.

The TYPE of health coverage you carry, however, may different throughout your life.  If you are self-employed or have an individual policy and are in your 50′s or older, you may find that an insurance plan with a high deductible ($5,000 or $10,000), basically designed to cover major medical issues, is extremely affordable and may make sense to take advantage of if you can afford regular cash outlays for ongoing minor medical needs and medications.  Such catastrophic coverage often costs just a FRACTION of what typical health insurance plans would cost.

There is one important thing to keep in mind with health insurance, however:  One should never attempt to fully self-insure themselves in this area, because the frequency, odds, and costs of medical problems vary greatly and are very difficult to predict.  Even with significant assets at your disposal, those assets could quickly be exhausted with major surgeries and expensive treatments in many situations. Insurance is at its best when it protects individuals against sudden, catastrophic losses that those individuals could not fund themselves.  So, for the best overall cost control, many people in average health will find it advantageous to participate in their employer’s group health insurance plan, or if such a plan is not made available to them, to instead hold a high-deductible individual plan and save for ongoing expenses — either way, they should have some form of health insurance coverage throughout their entire life.

Disability Insurance: The statistics on disabilities are interesting.  I have heard a variety of figures, but a commonly-quoted statistic is that a 30 year old male is greater than four times MORE likely to become disabled than die– and that an American is injured in an accident every 2 seconds.  Many young couples secure the financial future of their spouse should they pass away by securing life insurance, but few purchase disability insurance even though, particularly within an employer’s group disability insurance plan, it is very affordable, typically only a few dollars per week.

Premiums for disability insurance through a group plan should be paid as an after-tax deduction from your paycheck, so that the payout later should you become disabled is also tax-free.  Typically, disability insurance pays 60% of your wage at the time of your disability, but again remember it is tax-free.  There are short-term disability and long-term disability policies available.  If you have a large emergency fund, a short-term plan may not be necessary, but almost everyone of working age needs a long-term plan, as a permanent or long-term disability could otherwise be financially devastating to your family.  Another key issue to consider when buying disability insurance is “occupation specific”– in other words, whether the plan pays you disability payments until you are able to return to your traditional employment or whether it requires you to take work of some sort to bring in some money to help offset disability payments.  This is an important item to be aware of.

In my next post, I will provide basic info on the additional forms of insurance shown on the chart above that are not explained in this post.  Stay tuned!