Insurance: What You Need and What You Don't

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I'm not going to pretend the subject of insurance is sexy or exciting. But it sure is an important and, yes, potentially dangerous topic that deserves your full attention.
I say dangerous because if you screw up and don't have the right coverage-be it auto, home, or life insurance-you are risking financial disaster. All it takes is one mishap or setback that isn't covered by an insurance policy and you, or your loved ones, could easily end up bankrupt. (And starting this fall bankruptcy will be more painful than ever thanks to a new federal law that will increase the hoops consumers must jump through before they can file for personal bankruptcy protection.)
That's why it's well worth your time to make sure you have the right insurance coverage. Let's run through the various types of insurance you need-and don't need-as well as the key coverages you want to make sure are included in each policy. When we're done, if you need to buy any new policies, you can check out the online resources at Yahoo's Insurance Center (http://insurance.yahoo.com/). And be sure to look over my Print, Clip, and Save Checklist for Insurance Buyers for some smart shopping tips.
Life Insurance
This one doesn't need to be nearly as complicated, expensive, or daunting as you probably think.
First, the only reason you need life insurance is if anyone is dependent on your income. That can be kids, a spouse, a partner, an elderly parent. If no one is dependent on you, then you don't need it. That simple. And please, you new parents, do not let anyone talk you into buying a life insurance policy on your child. Remember, the point of life insurance is to replace income that would be lost if the policyholder dies. Working from the assumption that your kid isn't Dakota Fanning, there's no need to buy a life insurance policy in your kid's name, since your kid doesn't produce any income you depend on.
Next, you should only look for one type of coverage: Term life insurance. Do not-I repeat, do not-buy any other type of life insurance. There's another kind, called "cash value," which is a colossal waste of money, if you ask me. These cash value policies come in a variety of flavors, including whole life, universal life, and variable life. Just say no to anyone who tries to talk you into one of these plans. They can be more than 10 times as expensive as a term policy, yet you don't need any of the "extras" they come with. In fact, the big added feature of a cash value policy is that it provides an investment component. I won't go into a ton of details here other than to tell you that a life insurance policy is a lousy way to save and invest. So stick to a policy that simply provides life insurance and leave off all the expensive bells and whistles.
If you have already bought a cash value policy, I recommend canceling it and getting term life. Just don't cancel that old policy until you are fully approved for the new one. If you took out the cash value policy many years ago, or you now have a pre-existing medical condition, you may find it hard to get a cost-effective term policy. In that event, your only choice is to stick with the cash value policy.
A term policy provides your beneficiaries a death benefit (the payout on the policy) if you die while the policy is in effect. As its name implies, your policy is in force for a specific length of time, or "term." You want to make sure the term you choose matches your needs. For example, if you have a two-year-old child, a 20-year policy will provide coverage until your child is through (or close to through) with college. If you have a 13-year-old, a 10-year term policy will suffice.
Now for the size of the death benefit. No need for crazy calculations. We can keep this part simple too: Buy a policy where the death benefit is equal to 20 times the annual income your beneficiaries would need to support themselves without you. Why 20? Well, I believe you owe it to your family to be super-careful here. I want your beneficiaries to be able to live on that payout without having to touch the principal; the peace of mind this provides is priceless. So if your policy is 20x their annual needs, that means the payout could be invested in high-quality bonds earning 5 percent or so in annual interest. The interest income would produce enough for them to live on.
How about an example? Let's say your spouse and kids would need (before taxes) $50,000 a year to live on. Multiply by 20 and we come up with $1 million. Don't get all grouchy and think you can't afford a term insurance policy with a $1 million death benefit. A healthy 40-year-old male can get a 20-year policy for as little as $80 a month. For a 30-year-old the monthly premium can be as low as $50 a month. Come on, that's doable!
Now, if you were to die during that 20-year period, your beneficiary would receive a $1 million payout. If he or she then invested this lump sum in high-grade bonds earning 5 percent, the annual payout would be $50,000, without touching principal.
Maybe plenty of people will tell you I am going overboard with the 20x rule. Quite often you will see advice saying that all you need to "replace" is a few years of income or to just buy a policy that is equal to no more than 10x your beneficiary's annual income needs.
I don't think so. Never forget what has to happen for your beneficiary to collect on your policy: You have to die. It doesn't get any more traumatic than losing a loved one and a provider at the same time. So what happens if your beneficiary isn't in any shape to continue working, or if they've been out of the job market for years, or if they are simply too distraught to get a full-time job for a long while? They may even have been with you in a terrible accident and now have physical disabilities that prevent them from working to support themselves and the children.
My point is pretty simple: Why not give those you love the utmost financial flexibility in the event you die prematurely? Given the low cost of term insurance, you can buy them a ton of flexibility without breaking your bank account.
And one final life insurance tip: If you or your partner is a stay-at-home parent, please make sure you also have a term policy on their life, too. In the event the stay-at-home parent were to die, the surviving partner would need extra income to be able to pay for childcare. So tie the death benefit amount to what you expect your childcare costs could be and how many years you anticipate your kids would need that care.

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Health Insurance
Look, I know we've gotten ourselves into a horrible national crisis here, and a great many Americans are going without health insurance coverage because of the cost or are being forced to cough up more of their own money to pay for coverage previously offered as an employee benefit.
But folks, this is one area where you simply can't afford to be underinsured if there's any way at all you can help it. Remember, insurance is all about planning for the worst (which, of course, doesn't prevent you from also hoping for the best).

And if you or anyone in your family were to ever develop a severe illness, you would want to make sure you could afford the best care for them.So please, if you don't currently have any coverage, make this your main financial priority as of this moment. If you are a recent college grad who has yet to start work or are unemployed without coverage, you can buy short-term policies that will cover you for up to six months or so. (A great tip for college seniors: If you don't have coverage or are currently covered by your parents' insurance, buy a health plan of your own while you are still in school-one that will allow you to continue with the policy after graduation. Student policies are often a great deal, and being able to extend your coverage past your school years gives you plenty of flexibility while you job hunt.)
A key tactic for keeping your premium down is to choose a plan with a high deductible. Stick with me for a sec and you'll see the wisdom of this. A low deductible, say one of just $500 a year, can actually end up costing you more than one with a $2,000 deductible. That's because the lower the deductible, the higher the premium. Moreover, when you have a low deductible and make a ton of claims, your insurer might get ornery and jack up your premium when your policy comes up for renewal.
That's why the smarter thing to do-if you are generally healthy-is to choose a policy with the highest deductible you can afford. Since your deductible is the annual out-of-pocket money you are required to kick in before your insurer covers your health costs, base your choice on what you can afford to pay out from either an emergency cash fund or a low-rate credit card with a line of credit you intend to tap only for emergencies.
If you are totally strapped for money, at least get a policy that provides you with catastrophic coverage. The annual premium can be a lot lower since these policies basically only kick in after you meet a sizeable deductible of $5,000 or more. The idea here is that you are healthy enough so that you don't expect to need to use the policy for routine health care costs. At the same time, you'll have the peace of mind of knowing that if you become severely ill you (or your family) will not have to pay monstrous health care bills out-of-pocket.

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Disability Insurance
Quick question: Say you have an illness or an accident that prevents you from working-how long can you afford all your living costs before you start sliding into debt?
Scary thought, eh? That's where disability insurance comes into play. Some employers offer coverage, but please take the time to make sure you have a policy that will actually give you what you need. For starters, you want coverage that replaces at least 70 percent of your income. And it is very important that your coverage is for "owner's occupation." This means you will be eligible for payouts if your illness prevents you from returning to your pre-accident job. What you want to avoid is a policy that kicks in only if you are unable to work in any occupation. You also want to make sure your policy is "guaranteed renewable." This means your insurer can't cancel the policy on you as long as you keep up with the payments. And finally, ask about the "elimination period." This is the amount of time that must lapse after your injury or illness before your policy would start to pay you a benefit. Two months is typical.
Auto Insurance
In my opinion, minimum coverage is not good enough when it comes to car insurance.

In auto-insurance-speak, a typical minimum coverage policy might be expressed as 30/50/20. This means you have $30,000 worth of bodily injury coverage for each person, with a $50,000 limit per accident, and then $20,000 in coverage for property damage. I don't care if that's good enough to meet your state's requirements. Your goal should be to truly protect yourself in the event of a serious accident. I recommend aiming for a policy with 250/500/100 coverage. What you want to avoid is having someone sue you and come after your personal assets-such as your home-to settle an insurance claim. Putting all your finances at risk to avoid paying a more expensive premium today is not the right approach. You want to truly be insured, not just "sorta" insured.
And a special note about the medical coverage options in auto insurance. I advise you to be extra cautious about turning down or skimping on this coverage just because you have a good health insurance policy. That may be great for you, but remember that you need to insure everyone who's in your car.
If you are buying an expensive car, I'd also recommend seeing if your insurer offers "replacement cost" coverage. Typical coverage only pays you the depreciated value of your car, not what it will cost you to go out and buy the same car again. So given that cars start depreciating the moment the two front wheels leave the dealer lot, you might want to fork over the bucks to make sure, at least for the first few years you own your car, that you won't be caught short if your car gets totaled.
At the other extreme, if you are driving around a good ol' beater then you might be able to shave some dollars off of your premium by dropping the collision damage coverage altogether. If you figure you won't be able to get more than a few thousand dollars for your car, then it probably doesn't pay to have that coverage, especially when you factor in what the actual payout would be after the deductible.
Speaking of which, just like with health insurance, I think the smart move is to opt for a higher deductible on your auto coverage. Go for $1,000 rather than $250 or $500. Keep in mind that the real reason for your car insurance is to make sure you have coverage in place if there is a serious accident involving personal injuries. You don't need a low-deductible policy to cover fender benders. That's the sort of expense that can be paid out-of-pocket.
Home Insurance
If you haven't upgraded your home insurance policy in the past few years you could be dangerously underinsured. That's because you need to be certain that your policy is keeping up with the rising cost of replacing your home.
What you need to insure is not the current value of your home, but the cost to rebuild if it were destroyed. And given the sharp rise in building costs, you could be looking at a wide difference between the two. Let's say your policy is for $300,000, which is what you paid for the home a few years ago. But with rising home values and rising building costs you would be looking at a $450,000 tab if you needed to completely replace the house. Your insurer isn't going to fork over the $450,000. In fact, you'll be lucky to get 125 percent of the insured value, or $375,000 in this example.
So you need to work with your insurer to make sure you have adequate replacement cost coverage tied to rebuilding costs. Also, look for a policy that has an automatic inflation adjustment, so your coverage will increase each year to reflect rising home and homebuilding costs.

Renters also need coverage. Not for the actual property, but for everything you want to protect inside the home. With a renters policy, make sure again to get actual replacement cost coverage. Do not settle for a policy that will pay you just the depreciated value of a possession. For example, let's say you shelled out $3,000 for a plasma TV. If it's stolen, you want your insurance policy payout to cover the cost of buying a new plasma TV at the going market rate. What you don't want is to be told the depreciated value of that TV was $1,500 and that's all you're going to get.
For both homeowners and renters insurance, you should also ask the insurer to include an umbrella liability policy with your coverage. For about $200 a year, you get $1 million in liability protection. That's nice to have if you are ever sued over an accident on the property you own or rent, and the coverage applies to auto accident claims too.
Long-Term Care Insurance
Once you reach your 50s you should consider adding a long-term care policy to your insurance coverage. This will provide you with a payout to cover nursing home costs as well as a variety of in-home health care expenses.
Long-term care coverage can be costly, but with nursing home residency pushing $50,000 or more a year in many areas, the insurance is well worth it. I recommend buying a policy when you are between 50 and 60 years old. Wait any longer and you will face much higher premiums, as well as run the risk of being denied coverage if you have a pre-existing condition.
For individuals who spend time in a nursing home, the average stay is about three years. So to play it safe, you might want to purchase a policy that would help you cover up to four years of nursing home care. Notice I said "help." Don't forget that you will have other retirement income such as your 401(k) and IRA savings as well as Social Security. Long-term care insurance is meant to merely supplement your other income sources. Along the same lines, it's important to select a policy where you will be comfortable paying the premium not just today but 20 or 30 years from today; realize this is insurance that you will probably not need for a few decades, if ever. Because you are making a purchase for the relatively distant future, you want to be especially careful and stick with an established insurance company. I recommend buying a policy from an insurer that has been in the LTC biz for at least 15 years and has a strong rating of "A" or better.
Given the rapid rise in health insurance costs, you also want to make sure that this policy includes an annual inflation adjustment, just like your homeowners insurance. If you are under 70 years old, the inflation adjustment should work out to a compounded annual rate of 5 percent. If you are over 70, you want a simple 5 percent annual increase each year. And pay attention to the policy's "elimination period." This is the amount of time where you will be on the hook for all your costs-it's essentially the deductible for the policy. Many policies come with a 90-day elimination period. That can put a huge dent in your finances. If you can afford the higher premium, I recommend opting for a LTC policy with a zero-day elimination period.

by Suze Orman

SOURCE (http://finance.yahoo.com/)