This post is part of the textbook personal finance series which covers basic personal finance skills by going through an actual textbook, chapter-by-chapter. Check out the intro post for more information.
Last week, we started looking at what insurance is. This week, I’m going to go through the book’s section on creating your own insurance program. These are just suggestions, you should talk to an insurance agent about rates and implementation.
Step 1. Set Insurance Goals
Not everyone needs the same insurance. What you need to insure and how you need to insure it depend on what the impact would be to you if you lost it. For example, if you drive a beater, you will need the required insurance to cover any liability to a driver you hit but probably don’t need insurance to replace it if it crashes.
Our renter’s insurance policy asks what kind of stuff we have. Answer—low-end. All our furniture is used (except our bed) and it’s all gifts. If we had to replace it all at once, it’d certainly cost us, but we can’t honestly insure it for an amount that’d buy us all new stuff.
Figure out what it is in your life that would cause you hardship if it were lost.
Step 2. Develop a Plan to Reach Your Goals
Once you know what you need to insure, you also need to figure out what to insure it for. Minimal car insurance is legally mandated in almost all states and renter’s insurance is required by most landlords.
There are other kinds of insurance, like health insurance, life insurance and disability insurance which you will have to decided whether you need (probably the former, at least) and for how much. An unmarried person may not need any life insurance but may want to take out good disability coverage. A married couple with kids may need high life and disability coverage, and so on.
One of the important questions to ask yourself at this point is “Can I cover it myself?” If you’ve got savings and investments which your spouse/partner can rely on when you die, then you may not need life insurance. Or if you’re saving up to replace your car, you may decide that you only need coverage for what you do to others in an accident, not for damage to your own car because you’ll just replace it. This is called self-insurance.
Step 3. Compare Options and Purchase
There are a number of ways to compare costs online, but sometimes talking to an insurance agent on the phone (or face-to-face) lets you in on rates or deals you hadn’t been aware of when researching online. Whether you choose to go entirely electronic or to talk to agents, be sure to compare prices at a number of insurance agencies.
What would cost you $750/year at one place may cost $500 at another simply because they use a different algorithm. Be sure to ask about rate reductions if you buy multiple kinds of insurance through the same company (though the agent is likely to pitch this to you anyway).
Step 4. Review Insurance Plans as Necessary
The rule of thumb is that whenever you make a big life change, you should review your insurance. For the most part, it’s good one. If you get married, have a new child, buy a home, move, change jobs, or even buy a car, you should make sure that your insurance policies fit your life now not just your life before.
At some point, you may decide that you can drop life insurance because you have adequate retirement savings. Or you may lower the amount you’re insured for because all your children have grown up and you no longer need to worry about the plan covering their cost of living.
Do you have an insurance strategy? When was the last time you reviewed it?