Insurance agents once designed full coverage insurance programs for clients. As local insurance agencies become a thing of the past, how do you still get fully covered?
Some insurance is mandatory. Some insurance is optional. But how do you know which insurance you should buy and how much of it you need? That’s what this article will cover. First, we will discuss the major risk areas in most people’s lives. Then we will go over other areas of risk that may be applicable to you.
By the end, you’ll have a better understanding of the insurance planning process and be able to begin planning. Let’s go!
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What is an Insurance Program?
An Insurance program can mean a few things. For our purposes here, an insurance program is a comprehensive list of:
- The specific risks present in your life now or in the future
- Insurance policies that protect you, your family members, and your property from these risks
Throughout your life, you will experience an ever-changing landscape of risks. Any of them brings emotional and financial stress. The purpose of insurance is to alleviate that stress, whether by replacing your property or covering court costs in a lawsuit.
How To Build An Insurance Program for You and Your Family
The keys to building an insurance program that’s tailored to your life? Research, simple math, and self-reflection. Reaching out for help during this journey is a great idea. But beware that nothing is a substitute for your own knowledge. It’s hard to spot when someone is giving you bad advice if you don’t know much about the subject. The more you know, the better off you’ll be.
That being said, it doesn’t take years of research to build a great insurance program. Putting in some time upfront to understand the basics creates a foundation that’s easy to build on in the future. As you get older, have a family, buy a house—your insurance needs will change. When you go through these changes, it’s important to review your insurance program.
Life events that should prompt you to review your insurance program include:
- Move to a new residence
- Buy a house
- Marriage or Long Term Partnership
- New child
- Job changes
- Death of a family member
As things get more complicated, you can meet with a professional to help you cover all the bases. A financial advisor will be happy to help. It’s a good idea to look for reviews of the professional before you make an appointment. If you can, look for a financial advisor with the CFP certification.
Need some free advice? You can also talk to people at your community bank, local library, or community center. Often, you’ll get a ton of information, including community workshops and resources available in your town.
Major Risk Areas
Your insurance program should cover the areas of your life that make you vulnerable to loss. But risk isn’t universal. Everyone has a different set of circumstances and so faces different risk. The major risk areas are:
- Personal Belongings
- Short-Term Disability
- Long Term Disability
Managing major risks is the starting point for a comprehensive insurance program. But it’s by no means the end of your journey. Life is as full of risks as it is excitement. The risks you face will be as personal as your life story.
As you read over the following, bear in mind that this is the tip of the iceberg. Everything here is an overview to get you started. Make note of the areas of risk that are present in your life and take the time to review how to cover yourself.
Home Insurance: Buying Insurance for Your Residence
Homeownership isn’t just the heart of the American Dream, it’s the heart of most people’s retirement plans. Whether it’s to sell and downsize or spend the golden years, your home is vital. And carrying enough homeowners insurance to cover the complete loss of your home is vital.
The trick to carrying the right amount of homeowners insurance is to understand the cost of your risk. Home insurance covers a few things:
|Dwelling||To cover the structure of your home and other buildings on your property|
|Personal Belongings||To cover all the stuff in your home (more on this below)|
|Personal Liability||To protect you from lawsuits (more on this below)|
|Additional Riders||To cover any other hazard that puts your home at risk|
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What if you don’t own a home?
If you’re renting or you live with a loved one, the person who owns the property should have a policy. You should consider a renters insurance policy for your belongings, but it won’t cover the structure of your home. You may be able to add riders to your policy to cover damages you may cause. However, that may be hard to find.
Property Insurance: Buying Insurance for Your Personal Belongings
The stuff in your home, whether your rent, own, or nomad, needs insurance coverage. Take a moment and estimate the cost of replacing everything in your home:
What’s the total? We bet it’s a lot. Most people’s personal belongings value anywhere from $5,000 to $20,000. And if those belongings were suddenly destroyed, how would you replace them? That’s where renters and homeowners insurance comes in. Each offers provisions to protect your stuff. If you have especially valuable belongings, like jewelry, you can purchase additional riders to protect yourself.
If you’re renting or you live with a loved one, you can buy a renters policy. This is also true for people who are nomadic or temporarily living out of a vehicle.
Whether using homeowners or renters, be sure that your policy covers the replacement value or enhanced replacement value of your stuff. Some policies only cover actual cash value, which only reimburses you for the value of your belongings at the time they were destroyed or stolen.
On a final note, replacement value, higher coverage limits, and additional riders do mean you’ll pay higher premiums. It’s a fine line between buying too much or too little insurance, so be sure to think things through carefully.
Car Insurance: Buying Insurance for Your Vehicle
According to the Department of State, 95 percent of American households own a car. With a car comes car insurance. All states have minimum coverage requirements for drivers, known as financial responsibility laws.
It’s true that some states do not require drivers to carry insurance. In these states, drivers can carry substitutions for insurance, like a surety bond. Regardless, it’s a great idea to carry auto insurance, especially a liability policy.
There’s an insurance principle, don’t risk a lot for a little, forgoing your premium means you’ll pay out of pocket for any damage you cause in an accident. And if you’ve been driving without insurance, you’ll pay fines and be flagged as a high-risk driver. Making future insurance premiums even higher.
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How Much Car Insurance Should You Buy?
First, you need to buy at least enough to comply with the law and your lender. Your state will have minimum insurance (or minimum insurance substitutes) that you must carry. If you have a car loan, your lender will require you to carry more than the recommended minimum.
There are different types of coverage components. Bear in mind that each state will be different as to how it treats each coverage component. Here are the types of insurance you may be required to purchase:
|Type||What it’s for|
|Bodily Injury Liability*
|Covers the cost of medical bills and other injury expenses, up to coverage limits per person involved in an accident you caused.|
|Bodily Injury Liability*
|Covers the cost of medical bills and other injury expenses, up to coverage limits, for all people involved in an accident you caused.|
|Property Damage Liability*||Covers damages you cause to other people’s property.|
|Collision Coverage**||Repairs your car when you cause an accident by running into another car or object or rolling over your vehicle.|
|Comprehensive Coverage**||Protects your care from damage like hail, vandalism, and falling objects.|
|Uninsured Motorist Coverage||Protects you if someone hits your car, but doesn’t have any auto insurance.|
|Underinsured Motorist Coverage||Protects you if someone hits your car, but doesn’t have enough insurance to repair damages.|
|Personal Injury Protection (PIP)||Covers your medical expenses (up to coverage limits) after a car accident, no matter who is at fault.|
|Gap Insurance||If you total your car, this covers the difference between what your car is worth and what you owe on your car loan so you can pay off your loan.|
*Denotes minimum requirements components to comply with state law.
**Denotes coverage typically required by lenders.
Once you comply with state laws and your lender, you should carry enough car insurance coverage to ensure you can protect yourself from loss. What to account for:
- The cost to repair or replace your vehicle
- The cost of medical bills caused by a car accident
- The usual number of passengers in your car
- The frequency of uninsured or underinsured motorists
If you have an older car and enough money in your savings to replace your car, you can choose to forgo collision insurance. If you typically drive with several passengers, you’ll want to increase coverage amounts for things like bodily injury so you have enough for medical payments coverage.
Buying Insurance to Cover Medical Expenses
Health insurance really deserves its own book, but let’s do a quick overview. The basic rule of health insurance is to buy enough coverage to protect you from the most likely ailments. No one can be certain of their health now or in the future, so this is a tricky game. For most, health insurance comes down to affordability.
As a general rule of thumb, when you’re younger you can get away with carrying bare-bones insurance. The most common health problems you face are injury. However, as you age, you’ll need more robust health insurance. Of course, if you have a chronic illness or any other medical requirement, good insurance is vital to your physical and financial health.
If you have trouble finding affordable coverage, you can look into high-deductible plans. For these plans, it’s important to contribute to a Health Savings Account, which allows you to use tax-free dollars to spend on health care. And don’t forget to see if you qualify for government assistance to get you higher quality insurance.
Protecting Yourself from Lawsuits
Unless you’re in a profession that requires additional insurance, you’ll protect yourself from lawsuits in two ways:
- Residence insurance
- Car insurance
Both can offer you various degrees of coverage. The first can come in the form of renters, condo, or homeowners insurance. The coverage component is called personal liability. Every policy will be different, but most will protect you if:
- Someone hurts themselves on your property or in your home
- You cause damage outside your home, like to a hotel room
- Someone sues you for something you wrote on the internet
Car insurance also has a personal liability component. This covers you when you cause damage driving. After an at-fault accident, you may be sued by victims for medical bills, pain and suffering, and other losses.
Buying Short-Term and Long-Term Disability
Both long term and short term disability insurance protect you from losing wages in the event that an injury or illness prevents you from working. As its name implies, short-term disability is for temporary periods, to cover acute illness or injury. Long-term is for longer periods, usually two to three years, to cover chronic illnesses or injuries.
These policies are different from workers compensation, as they cover you for injuries resulting from activity outside the workplace. Think you’re immune? Think again. The U.S. Census Bureau calculates a 20 percent chance you will become disabled during your working life.
Many people get short-term and/or long-term disability insurance through an employer. But should you buy it if your employer doesn’t offer it? We think it’s a good idea for everyone; however, there are some situations where we think it’s a must:
- People who invested in education and now carry student loans
- People who have dependents relying on them for financial security
How much you need will depend on how much you make. If you have an expensive lifestyle, you’ll need higher levels of coverage. People who have less demanding expenses can consider lower levels of coverage. Just be sure it’s enough to make you whole if you have to rely on it.
As a final note, there is government assistance for disabilities. It is not as robust a safety net as purchasing your own policy. However, for people who are lower-income, have no dependents, and have no loans, relying on government-run disability insurance may be a better choice.
Buying Life Insurance
Many people are averse to talking about life insurance, but it should not be ignored. Especially if you have dependents or co-signers on loans. If you were to die suddenly, the people who depend on you would not only lose you. They would also lose your income. Those loans would need repayment and the rent would still be due.
This is why life insurance is so important. A life insurance policy pays for:
- Your lost wages
- Final expenses
- Debts like your mortgage and private student loans
- Child-rearing expenses like education
How much life insurance do you need?
The amount of insurance you need is dependent on your current lifestyle. A good rule of thumb is to provide enough money to ensure your family can live comfortably without your income for years. To get an amount suitable for your family, you need to cover:
- Your personal debts like credit cards and student loans
- Your funeral expenses
- You income for ten years—or for however many years until your youngest child graduates from high school
- Your mortgage debt
- Education costs for your children
As a general rule, term life insurance is less expensive than whole or universal life. The latter, however, come with many added perks and benefits. Generally, term life is great for single people or a couple without children. As your family grows, universal, whole, or universal-whole life insurance becomes more suitable.
Beyond the Major Risk Areas
You may have noticed that the major risk areas don’t cover everything. There are many other risks you’ll face over your life. These lines of insurance are just as important as the major risks if they apply to you. Here’s a quick rundown of possibilities:
The rule of thumb you should follow? If you can’t afford the loss, buy insurance.
Alternatives to Insurance
There are some alternatives to buying an insurance policy. The main alternative is to keep cash in a savings account to cover you if a loss occurs. This is appropriate only if the cost of replacement is less than the cost to carry insurance. Let’s look at an example:
Jenny has a beloved 2007 Toyota Yaris that’s reliable and well maintained. The car is worth $7,000. The maximum payout of collision or comprehensive coverage is the cost of the car minus a $1,000 deductible. The cost of adding collision and comprehensive coverage to her insurance is $800 a year.
In a few years, she plans to buy another reliable, used car for $10,000. She keeps that amount in a savings account. For her, the risk of losing that $6,000 due to an accident she caused does not outweigh the benefit of saving $800 a year. Especially because she has enough savings to purchase a replacement today.
This is also called a risk-benefit analysis: when you compare the different risks and benefits associated with them. On the one hand, Jenny risks losing $800 a year for the benefit of her insurance company paying up to $6,000 for damages to her car in a covered loss. On the other hand, Jenny risks losing the $6,000 she would have gotten from the insurance company if she causes an accident, but benefits by saving an extra $800 a year.
Because she keeps money in her savings to be able to make her whole, she chooses to save the extra $800 a year.
All this being said, the more expensive the possible loss, the less affordable it is to forgo insurance. Not to mention, some insurance is mandatory. Failure to comply with insurance laws comes with hefty fines, higher premiums later, and, in some cases, jail time.
As we said before: if you can’t afford the loss, buy the insurance.
There are many ways to lessen the chance of something going wrong. Installing an alarm system in your home, choosing a car with side-curtain airbags, or eating healthfully all reduce risk. Many insurance companies offer discounts for low-risk behavior. Be sure to check out which discounts are available to you. Renters insurance is inexpensive. Most policies cost between $100 and $200 per year, paid in monthly installments. The cost will fluctuate depending on the value of your personal belongings, coverage limits, and where you live. You can lower the cost of your premium by raising the deductible. Just don’t raise it too high. The cost of car insurance is dependent on several factors, including: Vehicle make and model, driving history, claim rates in your area, crime rates in your area, coverage limits, coverage components, and credit history.
Frequently Asked Questions About Insurance Planning
How can I protect myself and my property from risk?
How much is renters insurance?
How much does car insurance cost?
There are many ways to lessen the chance of something going wrong. Installing an alarm system in your home, choosing a car with side-curtain airbags, or eating healthfully all reduce risk. Many insurance companies offer discounts for low-risk behavior. Be sure to check out which discounts are available to you.
Renters insurance is inexpensive. Most policies cost between $100 and $200 per year, paid in monthly installments. The cost will fluctuate depending on the value of your personal belongings, coverage limits, and where you live. You can lower the cost of your premium by raising the deductible. Just don’t raise it too high.
The cost of car insurance is dependent on several factors, including: Vehicle make and model, driving history, claim rates in your area, crime rates in your area, coverage limits, coverage components, and credit history.
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It’s true that even the most comprehensive insurance planning can’t protect you from all loss. However, taking the time to understand, plan, and execute your insurance plan will save you and your family a lot of time, money, and heartache. Even if you don’t have a large and complicated financial picture, you’ll still benefit from learning more about insurance and planning. A little knowledge goes a long way.