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Insurance is one of the areas of personal finance that can be difficult to understand. There is so much disinformation out there. At one point, I felt confused and overwhelmed by all the insurance options available.
I’ll be the first to admit that insurance is not nearly as much fun to talk about as making money in the stock market or optimizing finances, but it is still very important. But, what is worse than making a ton of money, only to lose it by not being properly protected?
Let’s go over exactly which types of insurance you actually need in each stage of life and beyond.
Insurance Needed in Your 20’s
Let’s start with something I actually know fairly well. I worked for an insurance company assessing damage to cars for over two years.
For people that do not have any car insurance, please do not choose to pay the DMV a fee in order to waive insurance (in VA, this fee is $500). I have seen too many cars totaled and too many people hurt. You never know when an accident will happen.
According to the car industry, the average American is in one car accident every 17.9 years or about four accidents over their lifetime. With that said, let’s explore which type of coverage options you should have.
Collision insurance will help take care of YOUR car if you are at fault in an accident. When I was handling accident claims, I normally came across four types of deductibles – $100, $250, $500 and $1000.
Most finance gurus will tell you to get a $1000 deductible since theoretically, you should have that money set aside in your emergency fund. I recommend getting quotes for each of these deductibles to figure out what makes most sense to you.
Property Damage Insurance
This insurance pays for the damage that is inflicted on the other car in the collision. The typical range in Virginia according to USAA is $20,000 to $500,000. Let’s say that you choose to carry $50,000 coverage. This will be the amount total paid per accident. In this case, if you hit two cars, the insurance company would pay up to $50,000 total, not per vehicle. This means that if you hit two cars but caused $70,000 worth of damage to the cars, the insurance company would only cover $50,000. You would be responsible for the remaining $20,000. Yikes.
This is where we get serious. Property damage coverage is not something to scrimp on. If you live in an expensive city with luxury cars, you will want to have as much property damage insurance as you can afford. Think about it for a second. If you are in an accident with a Porsche, the damage to repair that car could easily cost more than $50,000. Do you really want to pay out of pocket for the remainder?
Bodily Injury Insurance
Now, let’s say you caused an accident, and unfortunately, the other party had to see a doctor. Bodily injury insurance pays for medical costs that they incur. This can quickly add up if there were significant injuries.
Here in the DC area, it’s not uncommon to encounter a deer darting across a roadway. These type of accidents are surprisingly not handled under Collision, but under Comprehensive. Comprehensive covers “acts of God”, such as hitting an animal, hail damage, or if your vehicle catches fire. This also includes if your vehicle is stolen.
Quick side note– I had a friend that use to cover the Fire and Stolen Car division of his company. He told me that a lot of cars that had been reported as missing or stolen were actually recovered within the thirty days. So if you ever find yourself in this situation, don’t start shopping for a new car immediately.
Rental Car Insurance
Additionally, unless you have rental car insurance, your stolen car would not automatically grant you a rental car. If you are at fault in an accident, the insurance company won’t give you a rental unless you have this insurance on your policy. Plus, the amount has a cap. So if you drive a Hummer and you want a similar type vehicle, be prepared to pay out of pocket. Most people go with the cheapest car option in order to maximize the amount of time that they can use the rental car.
Uninsured Drivers (UMPD)
Finally, let’s say that dreaded scenario happens, and an uninsured driver hits you. Don’t worry; not all is lost. Most states require insurance companies to cover something called UMPD, Uninsured Motorist Property Damage. This means that in most cases, you will be required to pay a $200 deductible to your insurance company, and then they will fix the car. You might be thinking, why should I have to pay for the damage the other party did to my car? It’s definitely an awful situation, but in this case, if you go through your insurance company, they will subrogate. That is a fancy word for suing the other party for the damages. If the insurance company is able to recover the damages from the other party, you will be able to receive your deductible back.
Medical Expense Benefits
Additionally, if you sustain injuries from an accident, these benefits will grant you reimbursement for any coverages that your insurance company does not cover. This is a nice benefit, but honestly, it is not one that I currently carry. This isn’t to say that it isn’t beneficial. I currently have very good insurance that covers almost all of my medical expenses, so I feel comfortable forgoing these benefits for now. In the future if my medical insurance deteriorates, I will probably reevaluate.
If you own a car with a loan on it, you may consider getting gap insurance, which is added to your Collision deductible. Gap insurance covers the difference between what you owe on the car and what the car is currently worth. As you know, cars lose value the second you drive off the lot. If you finance your car and experience a total loss in an accident, you are still responsible to pay the outstanding loan. Unfortunately, the insurance companies will only pay what the car is worth, not the loan value amount that is left on the car. Therefore, it is smart to have gap insurance if you have a newer car with a large difference between the car value and the loan value.
Hopefully I have peeled back the curtain of the car insurance industry, and you are now more knowledgeable in order to select the right insurance coverage for you.
Now that we’ve run through the various car insurances let’s turn next to health insurance.
Health insurance is currently mandated by law and enforced by the IRS. Otherwise, the individual is responsible to pay a penalty when they file their taxes. According to eHealth, insurance premiums for individuals are $4,000 a year, while family plans cost a little over $7,000 a year. This is expensive, but health insurance is not only vital to your health, but also to your finances.
A Harvard Study showed that 62% of bankruptcies are due to medical expenses. The more interesting part was that 72% of those that filed for bankruptcy had some sort of health insurance. What that says to me is that individuals are not getting enough insurance to cover themselves when a medical emergency happens. I encourage you to re-examine your insurance every year to ensure that your health coverage is correct for you.
So what are the various types of insurance available to you?
1. Health Maintenance Organization (HMO) plans
HMOs are one of the most common health insurance plans you can purchase. With this plan, you are basically buying into an entire network of health care providers who offer their services to you.
Although, one of the restrictions of the plan is when you select a primary care provider (PCP), that provider will be the sole coordinator of all of your health services and care.
This means that if you want to visit a specialist, you have to go through your PCP for a referral in order to cover your medical costs. Otherwise, you will have to pay out of pocket.
HMOs are usually best suited for individuals and families that don’t mind having their PCP choose their specialists for them.
2. Preferred Provider Organization (PPO) plans
Under a PPO plan, you and your family can see any healthcare provider in the insurance company’s network, including specialists, without a referral. In most cases, you are not required to choose a primary care physician or to get referrals to see specialists.
Families who visit a specialist regularly generally prefer this type of health insurance due to the flexibility it provides.
3. High Deductible Health Plan (HDHP) plans
High-deductible plans cross categories. Some are PPO plans, while others may be HMO plans.
This type of health insurance has a high deductible that you have to meet before your health insurance coverage takes effect. These plans can be right for people who want to save money with low monthly premiums and don’t plan to use their medical coverage extensively. HDHPs are often coupled with a Health Savings Account (HSA).
HSA’s are tax advantaged accounts that can be saved on a pre-tax or tax-deductible basis to pay for qualifying medical expenses, including annual deductibles.
Currently, the limit is $3,400 for Single people and $6,750 for families, with the ability to contribute $1,000 extra if you are over the age of 55.
What other insurances should you have in your 20’s and potentially beyond?
Most people in their 20s are renters. Renters insurance covers a tenant’s lost or damaged possessions as a result of fire, theft or vandalism. It also covers a tenant’s liability in the event that a visitor sustains injuries on the property. Renters insurance can also provide compensation for alternative living arrangements in the event that your rental unit or rented home becomes uninhabitable due to events such as storm damage or an apartment fire.
So why would you actually need rental insurance? Well, as a renter, if a fire destroys your possessions, your landlord’s insurance policy does not cover you. The landlord’s homeowner’s policy will cover to replace the existing dwelling but unfortunately not the renter’s contents.
Therefore, if you have anything valuable and you don’t have renter’s insurance, you as the renter would be out of luck. Keep in mind though, renter’s insurance typically does not cover flood damage or earthquakes. Otherwise, it covers pretty much everything else.
So how expensive is Renters insurance? It’s actually pretty affordable. You can receive roughly $30,000 of personal property coverage and $100,000 of liability insurance between $150-$300 a year. This means that it would cost roughly $15-$25 a month to insure your property.
Long-Term Disability Insurance
Long-term disability is something most of us don’t like to think about. However, according to Social Security Administration records, 3 out of 10 workers will become disabled before they reach the age of retirement. Further digging into the stats, it appears that 90% of people on disability are due to accidents or sickness OUTSIDE of work.
Long-term disability is not that expensive averaging in cost of $250 a year, or roughly $5 a week. For some of us, that means skipping Starbucks once a week to ensure coverage.
Insurance Needed in Your 30’s
If you own a home, I’d venture to guess 99% of homes have home insurance. Why? It’s because when banks lend money through a mortgage to a homeowner, they require that the homeowner buy insurance to protect the bank’s loan. Remember, you may think you own the home, but until you make that final mortgage payment, the bank really owns it.
Homeowners insurance typically covers damage caused by perils such as fire, windstorms, hail, lightning, theft or vandalism. However, it usually does not include floods and earthquakes.
Dwelling coverage pays to repair or rebuild your house, including electrical, plumbing, and heating and air conditioning costs.
Other Structures Coverage
This covers damages to detached structures such as garages, sheds, fences and even cottages on your property.
Personal Property Coverage
This reimburses you for damaged or destroyed personal items in your home, which could include your televisions, laptops, electronics, furniture, clothes and even athletic equipment.
Loss of Use Coverage
This pays additional housing and living expenses if you must move out of your home temporarily while it’s being restored.
This helps protect your assets and cover your defense costs in the event of a lawsuit because you or your family members are responsible for causing injuries or damage to other people or their property.
While insurance rates varies by state, on average it costs roughly $950 a year for an average home worth $188,000 in the U.S. You can expect to pay more if you are in areas that experience harsh weather conditions, or if your home is more expensive than the average home to insure.
Private Mortgage Insurance (PMI)
Unfortunately, PMI is something that is protection for the bank. In most cases banks require that you pay PMI if you make a downpayment of less than 20% down for your house. You must pay this PMI until the equity in your house rises above 20%.
Here’s the kicker. Your bank won’t tell you will your equity has pushed past the 20% mark and therefore you may unknowingly continue to pay this for years until you notify the bank.
So if you are paying PMI, I strongly suggest that you monitor your equity in your house closely. If there is a sharp rise in your home’s price and the equity in your home exceeds 20%, you should see if your bank will remove it.
This policy is normally bundled with either your homeowner insurance and/or car insurance and costs a negligible amount. When you have exhausted all of your homeowners and car insurance, Umbrella insurance kicks in. It provides additional insurance in case the claims go beyond your current insurance limits.
Umbrella insurance is also not very expensive when you think about it. Normally, umbrella insurance costs between $15-$25 a month for $1 million to $2 million in coverage. This is a fantastic deal if you live in a city full of expensive vehicles and are in need of additional protection if you exhaust all your car insurance.
Keep in mind when trying to obtain umbrella insurance that many insurance companies require that you have a certain level of coverage on your home and car before you can qualify. This means that you can’t have $20,000 of property damage and expect the umbrella policy to cover the rest. Often times, insurance companies require that you have $300,000 or more in coverage before they will consider offering umbrella insurance.
Whole Life VS. Term Life Insurance
One thing that infuriates me is the discussion on whether to obtain Whole Life or Term Life insurance. This is where I believe some brokers really try to confuse people. In my opinion, the only correct choice between the two is Term Life insurance.
Term Life insurance encompasses a certain amount of time to cover a certain amount of expenses. For instance, let’s say you have 15 years left on your mortgage. Once you pay off your mortgage, you will no longer have any debt. There is no need to carry life insurance past this if you have adequately saved for the future. In this case, you would need to buy a fifteen-year term life insurance policy.
Insurance brokers sometimes paint Whole Life insurance as a great investment over time with huge monthly premiums. The pitch may sounds nice, but it’s so false. Insurance should not be an investment.
Whole Life Insurance Is Costly
Let me explain in further detail. On average, Whole Life insurance is 10 times more expensive than Term Life insurance from the research that I’ve done. This means that if a Whole Life insurance policy costs $1,200 a year for a healthy 25-year-old, a Term Life insurance policy will in turn cost $120 a year. Now here’s the difference between the two policies. The Term Life insurance is fixed over a number of years.
For this example, let’s say it’s a 15 year fixed policy. Now let’s say that the Whole Life policy is worth $250,000. The insurance brokers would probably say the Whole Life policy is a great deal. You pay $1,100 extra dollars every year for the rest of your life, and your family will get $250,000 when you pass away.
Now, let’s do some quick math. Let’s make the assumption you are a healthy individual and will live until the age of 75. You decide to invest the difference of $1,100 into the S&P 500, which on average has returned 8%, instead of buying a Whole Life insurance policy. When you pass away at age 75, your family would receive a whopping $648,000. That is almost a $400,000 difference when you compare the numbers. As you can see, Term Life insurance is a much wiser option.
Insurance Needed in Your 50’s
Long-Term Care Insurance
According to the U.S. Department of Health & Human Services, 7 out of 10 Americans turning 65 will need some form of Long-Term Care in their lifetime. The current costs for an in-home aide is $46,000, and the cost of a private room at a nursing home is over $92,000 according to Genworth Financial. The shocking thing is that only 8 million people currently have Long-Term Care, while there are roughly 70 million baby boomers that may need some sort of Long-Term Care in the upcoming years.
Much of this is due to the sticker shock many baby boomers receive when inquiring the cost of Long-Term Care. Long-Term Care for a couple in their 50’s may cost over $3,000 a year and may shoot up in the future for any reason. Additionally, the longer that the couple waits, the more the insurance will potentially cost in the future.
One thing to remember: Medicare and other types of insurance do not always cover Long-Term care, since it is not a medical expense. So, you will need to check with your provider before making these types of decisions.