Chapter 4: Protect Yourself With Insurance

The purpose of insurance is to protect you and your family against major financial catastrophes. The key is to have the right amount of coverage – too much and you’ll be spending more than you should on what you don’t need; not enough and you put your assets in jeopardy.

Life Insurance
The primary purpose of life insurance is income replacement – to protect loved ones who depend on you for financial security. The birth of a child or buying a home where two incomes are needed to make the mortgage payments are common motivations to buy life insurance. Life insurance comes in two basic forms:

• Term insurance is bought for a specific period of time – a term of 1, 5, 10, 20, or even 30 years. If you die within that time frame, your beneficiaries will receive a preset amount of money (the death benefit). It never accumulates a cash savings, so if you fail to pay your premiums or die after the term ends, they receive nothing. The major advantage of a term life insurance policy is, if you are young, extremely low premiums for a substantial death benefit. However, each time you renew the policy (and the older you get), the more expensive term insurance becomes. Eventually, with many term policies, the cost of the insurance may not be worth the payoff value once you reach an older age.

• Cash-value insurance (also called permanent insurance) provides both a death benefit and, since a portion of the money you pay in premiums is invested, cash accumulation. The downside of cash-value insurance policies is that the premiums tend to be considerably more expensive than for term plans. However, as long as you make your premium payments the policy can never be canceled, and money does build up – important features to consider when making your decision.

Medical Insurance
Health insurance policies cover the cost of most medical expenses. Because of the extremely high costs associated with medical treatment, such insurance is important to have. Buying a policy before having an accident, a serious illness, or becoming pregnant is vital, since insurance doesn't cover health care for preexisting medical problems or conditions.

Many people have group health insurance plans through their employer or union. If you do, you may be required to pay a portion of the premium, particularly if you work part-time. Still, since the costs and risks associated with health care are spread among many, the cost to you is usually low.

Asset (house, car, heirlooms)
Homeowners insurance is required if you own your own home. It protects your personal property and personal liability, as well as your lender’s financial interest if you do not pay your mortgage balance. Consider adding a guaranteed replacement cost policy so you could rebuild at today’s prices (plus a little extra to meet current building codes). Flood insurance is also a wise investment, as water damage is common and extremely expensive to repair.

If you are a tenant, you may consider purchasing a renter’s insurance policy. Renter’s insurance provides protection for personal property in the event of fire, theft, or wind damage. Most policies come with liability protection, which protects you from the cost of someone having an accident in your home, as well.

Whether you rent or own your home, you may want to add even further to your policies if you own expensive jewelry, collectibles, artwork, and furs.

Most states require at least a minimum of automobile insurance. However, if want to protect yourself from lawsuits and high repair bills, buying more than what's required makes sense.

Long-term Disability
If you can’t work because of an injury or illness, long-term disability policies provide an income stream for a long period of time. This type of insurance is often available through employers, and generally picks up where short-term disability leaves off. Once short-term disability benefits expire, the long-term policy pays 50, 60, or 66 2/3 percent of your salary.