Insurance isn’t exactly the most exciting topic, but adequate insurance is absolutely the cornerstone for building wealth. In my years as a financial counselor, some of the biggest missteps I have witnessed have not come from missing out on the latest hot stock or investing in crypto currency; rather, they have involved being uninsured or underinsured.
Why do I need insurance?
There’s an old saying: insurance is something that you buy and hope to never have to use. No one *wants* to experience a car accident, a wind storm, or a catastrophic life event. However, if the last year has taught us nothing else, it has taught us that emergencies can happen anytime, anywhere.
Sometimes people balk at paying for something that they aren’t guaranteed to use. But that isn’t the point of insurance policies;we buy insurance as protection against financial catastrophe. We also buy it to take care of our loved ones.
Nevertheless, many people don’t truly understand the risks they face if they carry too little, or worse, no insurance at all. I’m going to concentrate on three types of insurance where I see issues pop up again and again.
Auto Insurance — less is NOT more
Most states require that you have basic auto liability insurance, which covers legal fees, bodily injury or death, and property damage to others in an incident where you are legally responsible. Some states also require motorists to carry personal injury protection (PIP) and/or uninsured motorist coverage. But these are just the bare minimum coverages.
None of the liability coverage pays for damages to *your* car or *your* injuries if you cause an accident or hit an object. You would have to add collision coverage for that. And if your car is damaged by hail, vandalism, flood waters, or is stolen and not recovered, it’s not covered unless you have comprehensive insurance.
I have seen people who only had the minimum coverage on their auto policy have a vehicle stolen and then have their lender seek to recover the entire balance of the loan since the collateral for the loan no longer existed.
Auto insurance premiums vary widely between insurers, and they also depend on factors such as area of residence, type of vehicle, miles driven, and credit score. It pays to shop around and occasionally compare policies, especially if you make any major life changes.
Homeowners Insurance — the devil is in the details
Homeowners insurance isn’t required by law, but if you have a mortgage, chances are good that your lender will require you to have a policy. Where I see people stumble is in not understanding their coverages and thus not realizing how much financial risk they are taking on.
Most policies have deductibles, the amount you must pay before your insurer covers anything. This can be a flat dollar amount, but it can also be a percentage. And it is not uncommon for certain types of claims, such as wind, hail, earthquake, or hurricane, to carry a higher deductible than for other types of claims. So, for example, if a house with $300,000 coverage is impacted by a hurricane and has a 10% deductible for that type of damage, the homeowner would have to come up with $30,000 out of pocket before the insurer paid anything at all.
And on the topic of natural disasters, homeowners should be aware that most policies do not cover flooding, whether it’s from storm surge, hurricane, or sewer backup. A separate policy, which usually costs only a few hundred dollars a year, is necessary.
When it comes to covering the stuff inside your house, not all policies are created equally. Some insurers offer replacement cost value coverage, which covers the true cost to replace your old items with new ones. Conversely, actual cash value insurance (which is very common) only covers the current value of your items after depreciation, which is considerably less.
If you don’t own a home, you should definitely look into renters insurance. Many clients don’t realize how necessary (and inexpensive!) this coverage is.
Renters insurance not only covers damages and liability caused by negligence, such as accidentally letting the bathtub overflow or having your 9-year-old knock so hard she breaks the glass on the front door (ask me how I know about that one!), but it also covers your belongings, even if they are in a car or a hotel room.
And no, the government does NOT cover your personal property if you are living in the barracks or in government housing. You still need renters insurance!
Life Insurance — do you have enough?
Life insurance is not pleasant to talk about, but it is essential to have if you have someone in your life (whether it’s a spouse, children, or a parent) who will be adversely impacted financially by your death.
I am personally a fan of term life insurance, and SGLI (Servicemembers’ Group Life Insurance) is a low-cost term life insurance policy that covers military members for $400,000 (unless declined). Military spouses are automatically covered for $100,000.
My point of caution here is that both service members and spouses may need more life insurance than what SGLI provides.
While there is no hard and fast rule, insurance agents often say you should have coverage that equals between 7 and 10 times your annual salary. But if you own a home, or have several children, or a lot of debt, your needs might vary. And stay-at-home parents should investigate what full-time, in-home nannies would cost when it comes to figuring out how much life insurance to buy.
Peace of mind
Financial health absolutely depends on being adequately insured. Policies should be checked on a regular basis, especially if there have been major life changes, such as marriage, purchasing real estate, or having children.
Insurance can save you from economic ruin, and that’s a pretty amazing return on a relatively small investment. But there’s another indefinable benefit to consider: the peace of mind you get when you know that you have minimized your risks and provided for yourself and your family.
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You can find this story and more in our 2021 Military Insurance Guide presented by AmeriForce Media. Download it here.