03/03/2011 02:40 pm ET Updated May 25, 2011

Insurance Reality Check

When it comes to insurance, many people face the Goldilocks dilemma: Am I buying too much coverage, not enough, or just the right amount? Unfortunately, there's no easy way to choose; and even when you do settle on coverage levels, your needs will probably change as your living situation evolves -- say when you marry, divorce, have a baby or retire.

So how do you determine the proper insurance levels while ensuring that you're not wasting money on unneeded coverage -- or worse, leaving yourself and your family exposed? Here are a few considerations for some of the more common insurance types:

Health insurance. Everyone needs medical insurance, even the young and healthy. One serious accident or unexpected illness could wipe out your savings and plunge you into debt or even bankruptcy.

If you're covered through your employer, carefully compare all plans offered. The one with the lowest premium may not necessarily be your best option. Consider how other factors add up -- things like deductibles, copayments, allowed/disallowed benefits, out-of-network charges (important if your doctor/hospital isn't in the network) and whether your regular medications are covered under the plans' drug formularies.

Also compare costs to cover you and your children as dependents under your spouse's plan options, if available. Just make sure the coverage is comparable for the price, and exercise caution if you fear your spouse may be vulnerable to a layoff.

If you're not covered though your employer, you may have other options:
  • If recently laid off, ask about COBRA continuation coverage through your former employer.
  • If 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 for details.)
  • High-deductible plans provide comprehensive coverage for catastrophic illnesses at much lower premiums than comparable low-deductible plans. An insurance broker can help you find appropriate private coverage -- try the National Association of Health Underwriters if you don't know one. But be aware that even minor preexisting conditions may render you ineligible.
  • 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 the National Association of State Comprehensive Health Insurance Plans (NASCHIP) for information.
  • Health Insurance Portability and Accountability Act (HIPAA) insurance may provide coverage if your COBRA has expired and you don't qualify for private insurance. Eligibility rules are very complicated so consult a knowledgeable insurance broker.

Life insurance. This one really depends on your family situation. If you're single with no dependents, you may 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, many experts recommend buying coverage worth at least five to 10 times your annual pay.

A few other considerations:
  • If you're young and healthy you may be able to get a better deal on your own than through your employer's plan.
  • After your kids are grown you may be able to lower your coverage; although carefully consider your spouse's retirement needs.
  • Most people don't need life insurance on their children, since children don't have earnings to offset; but you might want spousal coverage if you depend on his or her income or would need to pay for child care to keep working full time.
  • If you're divorced and alimony and/or child support is included in the settlement, buy a life insurance on the person paying it, naming the receiving ex-spouse as beneficiary.
  • has an online calculator that can help you determine how much coverage you should have.

Automobile insurance. Almost every state requires insurance if you own or drive a car, and for good reason: It protects you financially should you cause an accident or be hit by an uninsured driver. Rates may vary considerably depending on such factors as: coverage and deductible levels for liability, uninsured motorist and collision; work commute; age and driving record; vehicle year and model; number of insured family members; and security features (alarm, airbags, secured parking, etc.).

Ruth Stroup, a Farmers Insurance Group agent from Oakland, California sees many of her new clients coming in with ill-fitting policies. She offers a few tips for lowering car insurance costs:
  • Shop around -- rates vary widely among carriers.
  • Increasing your deductibles from $250 to $1,000 might lower your premium by 15 to 30 percent.
  • Ask about discounts for safe drivers, age 55+, linked homeowners/renters insurance, etc.
  • With collision and comprehensive coverage, most carriers pay only up to the vehicle's actual cash value, minus deductibles. Thus, some people with older cars drop this coverage, since repairs often cost more than the car's worth. But remember: If you drop this coverage and later rent a car, you'll need to purchase the rental agency's collision and comprehensive coverage to be fully protected.

"My biggest tip on auto insurance is to make sure your liability insurance relates to your net worth and income," said Stroup. "It only takes one accident to wipe out your savings. Transferring this risk to an insurance company is very inexpensive for good drivers."

Homeowners/Renters insurance. Your home is probably your largest investment, so don't risk losing it and its contents through an unforeseen disaster, accident or robbery. Renters also need insurance: Your building itself is probably insured by the owner, but your contents are not. You -- not your landlord -- are responsible for replacing damaged or stolen possessions.

A few tips:
  • 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.
  • Replacement cost insurance is more expensive than actual cash value insurance but may be worth the difference. For example, the former would replace a stolen 10-year-old TV with a new one, whereas the latter would deduct 10 years' of depreciation from the settlement.
  • Buy additional coverage on expensive items like jewelry, art and computers, which may have limited coverage.
Coverage you may not need. Many people opt to forego these plans:
  • Primary mortgage insurance (PMI). As soon as the outstanding balance on your mortgage drops below 80 percent of your home's value, federal law allows you to drop this coverage -- coverage which protects the lender, not you.
  • Extended warranties. These policies often duplicate coverage already provided in a standard warranty; plus, your credit card may provide its own warranty on purchases.
  • Flight accident insurance. The risk of plane crashes is miniscule, and you may already be covered if you bought the ticket with a credit card -- read your policy for rules.
  • Before buying a standalone policy on a boat, RV or other big-ticket item, compare the cost of adding a rider to your homeowner's insurance policy.

Don't forego critical coverage to save a few bucks: It's not worth it in the long run.

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 4, 2011, go to Practical Money Skills.