Financial Defense

Playing a Great Game of Financial Defense

No one has ever accused an insurance policy of being a page-turner. However, those packets of boring legalese are essential for financial success.

Let’s look at some of the most important types of insurance so you can determine how to get the right coverage at the right price.

Life Insurance

Do you need life insurance? The best way to answer that question is to consider whether anyone would suffer financially if you died.  Oftentimes, a couple will buy life insurance when they have their first child.  But there are some other circumstances that may prompt a need for life insurance as well.

If you decide to buy a policy, you’ll need to decide how much life insurance to buy.

Next you’ll need to decide what type of life insurance to buy.  The two main types are term and permanent.

Term life insurance is pure insurance, covers a temporary need, and is the least expensive type of life insurance. By “pure insurance,” I mean you pay for the death benefit and nothing more. Term insurance covers you for a specific period of time, typically ranging from one to thirty years, hence the name term.

Couples often choose term insurance in order to protect against their pre-mature deaths while their kids are younger than eighteen or perhaps until they are done with college. They assume that by that point life insurance won’t be needed any more; they will have been diligent in saving and investing all those years and will have enough assets to provide for the surviving spouse. This philosophy is usually described as “buy term and invest the difference.” You just need to make sure you don’t buy term and spend the difference!

If you go the term route, it’s generally best to choose a level premium policy, which means you will pay the same amount every year for the term of the policy. Also, ask whether the policy is convertible. Convertible policies give you the option to switch the policy to a permanent policy without having the take a medical test.

Permanent life insurance, also called whole life, gives you a death benefit and a savings or investment account, provides permanent coverage (assuming you keep up with the premiums), and is much more expensive than term life insurance. Whereas a term policy may cost you roughly $15 to $30 per month per $100,000 of death benefit, a permanent life policy could cost $150 to $300 per month.

Young couples with kids usually need a lot of insurance and have many other expenses. For those reasons, term is often the most viable way to get the coverage you need at a price you can afford. But there are some circumstances where a permanent life insurance policy may make sense.

Medical Insurance

One way to save on health insurance is to opt for your company’s flexible savings account (FSA), if available. With such accounts, you pay various out-of-pocket medical expenses with pre-tax dollars. Many expenses qualify, including co-pays, deductibles, and prescription eyeglasses. But flexible spending account money not used by the end of the year is lost (at some companies there is a short grace period into the next year), so you need to make a good estimate about how much out-of-pocket expense you’re likely to have over the coming year.

Another option may be a health savings account (HSA). Used in conjunction with a high-deductible health insurance plan, this money is saved pre-tax, just like FSA money. However, this money can be carried over from year to year and you can set aside more money in an HSA than you can an FSA.

Disability Insurance

Your ability to earn income is one of your most valuable assets. According to the non-profit Life and Health Insurance Foundation for Education, one in seven workers can expect to be disabled for five or more years before retirement. That’s why disability insurance is so important, yet less than half of employed adults have disability insurance.

The least expensive way to get disability insurance is usually to purchase it through your employer. Should you become disabled, workplace policies typically replace 50 to 60 percent of your income up to a specified limit and until a certain age.  If you don’t have coverage through your employer, purchase a policy on your own.

You’ll find more information about disability insurance, including a needs calculator, on the Life and Health Insurance Foundation for Education’s web site.

Homeowner’s/Renter’s Insurance

If you own your own home, you need homeowner’s insurance to protect your home and your stuff.  Assuming you already have a policy, double-check to make sure you have the right homeowner’s insurance coverage.  If you rent, you’ll need renter’s insurance.

Vehicle Insurance

One more type of essential coverage is vehicle insurance.  A great way to save on this coverage is to manage your collision and comprehensive deductibles.  If you have an adequate emergency fund, you can afford to raise your deductibles, which will lower your premiums.  You just need to be comfortable with the idea that you are responsible for paying the amount of the deductible if you have a claim.

One final note about homeowner’s/renter’s and vehicle insurance is whether to go with a low-cost online provider or to work with a local agent.  It can be tempting to go the absolute lowest-cost route, but I prefer to work with local agents. When I’ve had a claim, there’s something very comforting about being on a first-name basis with an agent.

What other ideas do you have for getting the best insurance coverage for the best price?  Let me know in the comments section.

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2 Responses to Playing a Great Game of Financial Defense

  1. Long Term Returns March 21, 2012 at 9:23 AM #

    9 times out of 10 using insurance as a savings/investments vehicle is very much a money-losing proposition. Yes, you get tax deferral. But you’ll be stuck with terribly expensive investment choices and all sorts of fees should you try to get out early. Plain term life insurance is a must for family bread winners. Getting anything “extra” out of insurance is a bad idea in vast majority of cases.

    • Matt Bell March 21, 2012 at 4:00 PM #

      I agree that in most cases term is going to give people the best combination of proper coverage at an affordable price. However, I’m definitely not in the camp of those who tell people to never ever buy whole life. There are some times when it makes sense.

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