Where to Start with Insurance Needs?
By Melanie Dabb, Extension Assistant Professor
Whether you have the correct amount and type of insurance coverage is going to depend on your individual circumstances; age, health, lifestyle, children and employment. Generally, most people should have at least major medical, auto, life, home owners/renters, and long-term disability insurance. First and foremost, it is very important to read your insurance documents and make sure you know exactly what is covered and what the restrictions are. Many people only rely on what their agent or others have told them. However, if you need to make a claim it will be based on what’s in your documents. If you have questions, it is best to consult your insurance agent or a financial planner to help you navigate this process, but this article will get you started.
When we purchase and use insurance we are responding to risk. These risks include a significant loss of funds, health or property. There are four main ways we manage risk. First is to eliminate the risk. Is there something you can do to make the risk irrelevant or make it go away completely? An example of this is to avoid driving in bad weather to eliminate the risk of an accident. The second way to manage risk is to reduce the risk. Some examples of this are quitting smoking or taking a safe driver course. These activities reduce the risk of having a negative event. Third, we can share or transfer the risk. This is usually what happens when you purchase insurance. For a price, you transfer the risk of a negative event to the insurance company. The last way to deal with risk is to retain the risk. This is where you look at your resources and decide that you can handle the loss by budgeting or utilizing your resources to take care of the loss yourself. An example of this is an insurance deductible. With a deductible, an individual retains the first portion of a loss or claim. A higher deductible can reduce the premiums you pay on an insurance policy saving you money.
When you are assessing your insurance needs, you will need to weigh the cost of the insurance with the risk of a loss. There are 5 costs to keep in mind when carrying insurance:
1. Premiums: monthly payments for the coverage
2. Deductible: the first dollars for cost of service
3. Co-Insurance: percentage of cost up to a certain amount
4. Flat Dollar: a co-pay that is charged each time a service is used (found in managed care plans)
5. Any costs that exceed maximum benefits (annual or lifetime)
Most people are required to have auto and homeowner’s/renter’s insurance. This is one place where it’s important to look at your documents and know exactly what is covered. Often the minimum state requirements aren’t enough to cover a significant loss and you will need to weigh the cost of adding additional coverage with the risk of filing a claim. One example of this is your underinsured/uninsured motorist coverage. If someone without insurance causes an accident you would be glad to have the extra coverage on your policy and it’s relatively inexpensive. Another coverage that is relatively inexpensive but can be very beneficial is emergency roadside. If something happens to your vehicle it will be easier to manage if you don’t have to worry about towing expenses in addition to the car repairs.
A lot of people ask about life insurance. The two main reasons a person may want life insurance coverage is wage earner with dependents who need to plan for wage replacement in the event of premature death and those who need to plan for expenses to settle their estate or leaving a gift or bequest after death. If you are looking to replace wages until retirement age, or until your dependents become financially self-sufficient then a term life insurance policy will be more appropriate. If you are needing the funds to settle an estate, a whole-life or universal-life insurance policy will more likely meet that need.
What does all this mean? As you are evaluating your current insurance coverage and deciding if your needs are being met, there are 3 questions you need to ask yourself:
- How likely am I to make a claim?
- Can I afford the coverage?
- Do I have enough funds or resources to cover a claim (am I self-insured)?
Sorting through areas of your life where you are at risk for loss can feel daunting and negative, but taking the time to identify these risks and then looking at your insurance coverage and other resources you have available to manage them will give you peace of mind and help you be prepared for an unexpected event.
- House, Ann (2011) Spring Clean Your Financial House [Fact Sheet] Retrieved from: https://digitalcommons.usu.edu/cgi/viewcontent.cgi?article=1151&context=extension_curall
Certified Financial Planner Board of Standards, Inc. (2015). CFP Board Financial Planning Competency Handbook (Wiley Finance) 2nd Edition [book].
- Healthcare.gov (2020) Open Enrollment Period Retrieved from: https://www.healthcare.gov/glossary/open-enrollment-period/