Many people adopt a "penny wise, pound foolish" mentality when it comes to buying insurance. When trying to lower expenses, some will drop or reduce needed coverage, gambling that they won't become seriously ill, suffer a car accident or fall victim to a fire or other catastrophe. But all it takes is one serious uncovered (or under-covered) incident to potentially wipe you out financially.
Here are insurance policies no household should be without:
Medical. This is the most critical -- and unfortunately, the most expensive -- coverage you need. When comparing plans, consider:
- Are your doctors in their provider networks? If not, can you afford out-of-network charges -- or are you willing to find new doctors?
- Are your medications covered under the plan's drug formularies?
- Do they restrict specialized services you might need like maternity, mental health or weight reduction treatments?
- If you choose catastrophic coverage in order to lower premiums, can you afford the high deductible in case of an accident or major illness? (Note: In a recent Kaiser survey, fewer than 20 percent of respondents with high-deductible plans understood that preventive office visits, medical tests and screenings don't count toward their deductible, meaning these preventive care measures are free or have only a modest copayment. Read your plan carefully so you're not leaving valuable benefits on the table.)
- If your employer doesn't offer medical insurance, can you obtain coverage through your spouse's employer?
- If you were recently laid off, ask about COBRA continuation coverage through your former employer.
- If you're under age 26, you may be able to enroll in a parent's plan, even if married or not living at home, thanks to the Affordable Care Act. (See HealthCare.gov for details.)
- Most states provide high-risk insurance for people who don't qualify for private insurance. It's costly, but no one can be turned away. Visit www.naschip.org for information.
- Health Insurance Portability and Accountability Act (HIPAA) insurance may provide coverage if your COBRA coverage has expired and you don't qualify for private insurance. Eligibility rules are very complicated so consult a knowledgeable insurance broker.
Homeowner/renter. Faulty plumbing, fires, theft and home-accident lawsuits are just a few catastrophes that could leave you without possessions or a place to live. A few tips:
- "Actual cash value" coverage repairs or replaces belongings, minus the deductible and depreciation, whereas "replacement cost" coverage will replace the items in today's dollars. Depreciation can significantly lower values, so replacement coverage is probably worth the extra expense.
- Jewelry, art, computers and luxury items usually require additional coverage.
- Review your coverage periodically to adjust for inflation, home improvements, new possessions, change in marital/family status, etc.
- The market is competitive, so compare your rate with other insurance carriers. Make sure to get "apples to apples" quotes, since policies may have varying provisions.
Vehicle. You probably can't even get a driver's license without demonstrating proof of insurance. Consider these coverage options:
- "Liability" pays if you cause an accident that injures others or damages their car or other property.
- "Uninsured motorist" pays for damage caused to you or your car by an uninsured motorist.
- "Collision" pays for damage to your car resulting from a collision and "comprehensive" pays for damage to your car caused by things like theft, vandalism and fire. However, they only pay up to the actual cash value (ACV) minus deductibles. Because the ACV for older cars is low, repairs often cost more than the car is worth; therefore many older-car owners drop this coverage and increase liability instead.
- (Note: If you drop collision/comprehensive, your policy may not protect you for that coverage on rental cars, so don't automatically waive the rental collision/comprehensive insurance without checking.)
- Common ways to lower premiums include: Raising deductibles; discounts for good drivers, exceeding age 55 or installing security systems; comparison shopping; and buying homeowner and car insurance from the same carrier.
Umbrella policy. If you own significant property, investments or savings, consider buying an "umbrella policy," which supplements your existing homeowners and auto insurance policies with additional personal liability insurance. It's a relatively cheap way to protect yourself from expensive lawsuits -- the first $1 million in coverage usually costs only $200 to $400, with additional $1 million increments considerably cheaper.
Life insurance. If you're single with no dependents, you may be able to get by with minimal or no life insurance -- although you may want enough to cover your own funeral expenses. But if your family depends on your income, experts recommend buying coverage worth at least five to 10 times your annual pay. A few other considerations:
- Many employers offer coverage, but if you're young and healthy you may be able to get a better deal on your own.
- After your kids are grown you may be able to lower your coverage; although you should carefully consider your spouse's retirement needs.
- You probably don't need life insurance on your children since they don't have earnings to offset; but you might want spousal coverage if you depend on each other's income or would need to pay for child care to keep working full time.
- If your divorce settlement includes alimony and/or child support, buy a life insurance policy on the person paying it, naming the receiving ex-spouse as beneficiary.
- SmartMoney.com has an online calculator that can help you determine how much coverage you should have.
Don't gamble your future financial stability by passing on vital insurance coverage -- the odds aren't in your favor.
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.
To participate in a free, online Financial Literacy and Education Summit on April 17, 2013, go to Practical Money Skills for Life.