Financial Literacy 2007 - Insurance
5 insurance must-haves

The insurance landscape is shifting. The days of relying on policies to cover small-ticket items like parking lot fender dings or water damage to attic relics are over. Gone too, for the most part, is the era when patients could expect full medical coverage through insurance. Except for those in a group health insurance plan, claim filers often receive jumps in premiums or notifications of dropped coverage.

If insurance has changed into a tool you hesitate to use, why should you bother? Three reasons: you, your family and everything you own. It's a means to protect yourself against catastrophic damage to your finances. Most people will need all of these five insurance policies at some time in their lives.

Do you need ...

Do you need life insurance?

The primary purpose of life insurance is to replace the income that is lost when someone dies. No working person should consider it out of reach -- a healthy 40-year-old female can get a half million dollars in term insurance coverage for less than a dollar a day. At the same time, if no one is relying on you financially, you might not need life insurance.

How much coverage?

Your life insurance requirement translates to how much income your family would need if you died. It's determined by what the ongoing financial needs are or soon may be. The needs are greater if you have to factor in taking care of aging parents or a disabled child.

In single-income families, you should consider how much in costs you'll need to offset if the nonsalaried spouse is a caregiver, says David F. Woods, president of Life & Health Foundation for Education, a nonprofit organization for public education focusing on life, health, disability and long-term care insurance. Even though the caregiver does not earn an income, in the event of untimely death, his or her work on child or elder care, housekeeping and cooking may need to be replaced by paid help.

A lot of variables must be considered when determining the amount of life insurance to get, including your financial assets, spouse's income plus any expected inheritance. Bankrate's insurance calculator can help you determine the amount of life insurance you need.

Which policy?

There are two main choices when it comes to life insurance: term life insurance (temporary) or whole life (also called cash value or permanent). Talk to your agent or adviser about which makes the most sense for you.

Once people hit their late 50s, they may drop term insurance because it gets more expensive, but that doesn't mean they don't need it, says Woods. The cost of cash-value insurance doesn't go up as you get older, though premiums are much higher from the start. And although a payment lapse in term insurance means the end of your coverage, with permanent insurance, a portion of your investment, called the cash surrender value, is returned to you. That money can be used to keep coverage in force during times of unemployment or financial difficulty.

Conventional wisdom says that as your dependents become self-sufficient and your mortgage gets paid off, your need for life insurance decreases, but Woods has another take. "Even though the reasons you need it might change, the amount you need might even go up," he says. "What you buy at 35 might fit your needs then, but as you get older your standard of living increases. And even though the mortgage is paid and the kids are through college, inflation and standard of living changes mean that you'll want to make sure you leave enough for your spouse."

Do you need disability insurance?

Long-term disability insurance replaces lost wages due to illness or injury. Statistics reflect the need for disability coverage: Nearly one out of every three workers will suffer a disability lasting three months or more at some point in their career, according to Life & Health Foundation for Education (LIFE). U.S. Census Bureau figures show that nearly one in five Americans will become disabled for a year or more before age 65. These figures gain even more significance considering that 70 percent of working American adults can only afford to take off one month or less of unpaid vacation before everyday expenses would force them to return to work, according to statistics tracked by LIFE.

How much coverage?

Because disability benefits are paid monthly, consider how much money you would need to pay your bills every month if you were disabled. You generally can't buy a policy that covers more than 60 percent to 65 percent of your gross earnings, but if you buy your own policy, you won't have to pay taxes on your disability checks. That means in essence your take-home pay would be about the same. Be aware that bonuses and other forms of pay outside of base salary are generally not included in the calculations.

Many employers pay for disability insurance or for a large part of it, which is a good thing. But if your employer is paying the premiums, then the benefits will be taxable to you. So you need to determine how much you'll have to work with after taxes and perhaps consider purchasing an additional policy.

Which policy?

When shopping for disability insurance, ask if the agent has expertise in disability, warns Woods. Disability is a less standardized and therefore more complicated product.

Here are a few areas to consider:

How long would you want the benefits to last? If you're interested in disability for the long haul, consider putting an inflation protection rider which would increase the benefit.

What's the definition of disability on that policy? In other words, how is your disability determined? Normally the coverage only applies if you are under a doctor's care and unable to work and have a loss of income as a result. If you work in a high-paying specialty, such as dentistry, consider coverage that pays out if you cannot perform your specific job (known as an own-occupation or "own-occ" policy) rather than any job.

The longer you can wait before beginning to receive disability payments, the lower the premium will be. Consider building a fat emergency fund to tap in lieu of early payout on disability insurance, so you can safely scale back coverage to only kick in when you're out of work for long periods of time.

Do you need health insurance?

While consumers generally buy insurance to cover themselves in case of disaster, health care is the exception to the rule. You need it for expensive hospital stays and for checkups with your family doctor. "Because of their size, insurance companies have negotiated discounts," says Matt Tassey, past chairman of Life & Health Foundation for Education. "So instead of $200 for an office visit, you pay a $20 co-pay and the insurance company pays $90."

People without insurance, and therefore without a primary care physician, often end up using the emergency room as their physician with charges of up to 20 times the cost of routine care. Many hospitals limit access to patients without insurance because costs for hospital stays add up quickly, to the point where many people can't manage to pay for care on their own. Tassey warns that one person in 11 will need hospitalization or outpatient surgery in a given year. Health insurance protects your assets in case of big bills and provides access to convenient or quality care.

How much coverage?

According to Tassey, $450 is the average amount most Americans spend in a year on health care. However, in the event of sickness or injury that requires hospitalization, costs often rise to $40,000 or $50,000, even for short stays. Generally insurance coverage caps out at $1 million to $3 million, but can also cap out at $50,000, leaving you responsible for serious illness or injury treatments, so pay attention to that maximum lifetime policy benefit number.

A traditional delivery of a child today is around $7,000 to $10,000, but if the child is born premature, costs routinely run upwards of $330,000. The providers are going to expect to be paid somehow, and if you have assets, you're going to be expected to tap those. "You have to think what the impact of not being insured will be on your 401(k) balance, IRA or home if you have a home," says Tassey.

Even with comprehensive coverage, you could be underinsured if you have a high deductible and no means to cover it. In the individual market there are often $5,000 deductibles.

Which policy?

When shopping for disability insurance, ask if the agent has expertise in disability, warns Woods. Disability is a less standardized and therefore more complicated product.

Here are a few areas to consider:

If you can access coverage through an employer, it will be your best bet. Employers are able to negotiate better rates than you could on your own. Absent that option, going with a group is still often the cheaper route. A number of associations offer group health care to their members, so look to professional, trade or community organizations. "The individual market tends to offer a less generous payout at a much higher cost," says Tassey.

There is an array of choices that breaks down into a few categories: Managed care (including HMO, POS, and PPO plans), which most people have these days; indemnity, also called fee-for-service plans, that once were the standard; and consumer-directed plans, the new kids on the insurance scene, which come with high deductibles and are often paired with a health savings account. After age 65, Medicare kicks in.

All of the plans will operate pretty well if you have a terrible catastrophe, but if you have chronic illness such as diabetes or ongoing chemotherapy treatments, you'll need to look more deeply at your coverage choices.

"When you're young and healthy you worry about accidents," Tassey says. "I often liken our need for coverage to a car. When it comes out of the showroom it looks good and you generally are only worried about wrecking it, but with time you need maintenance."

Make sure the plan you choose covers the treatment you anticipate needing. Look at enrollment materials to make sure your physicians are in the network. Check into the use of screening tests, whether they be mammograms or colonoscopies or blood tests. See if preventative care is available when looking at a consumer-directed plan.

Whichever policy you choose, make sure you stay covered. If you have what is termed a life event, notify the insurance company within 30 days. Life events are the big things: you get married or divorced, have a baby, adopt or become widowed. If you get married and your spouse is joining your health plan, unless you tell the insurance company in a timely manner, you'll have to wait until open enrollment, which is usually an annual occurrence. To the surprise of some new parents, even if insurance covered your pregnancy and delivery, you need to notify the company to add your baby on the plan.

When you leave work and go to a new employer, find out when the medical insurance there starts. Say you have a 90-day waiting period, if you are coming from an employer with more than 20 employees, you can use the federally mandated COBRA coverage (Consolidated Omnibus Budget Reconciliation Act). If you terminate employment, you can generally keep COBRA at 102 percent of company pricing for 18 months, and if you have been widowed that coverage period extends for three years -- even longer if you are disabled.

Do you need homeowner/renters insurance?

Insurance is usually designed for catastrophic losses, not maintenance issues, and nowhere is this more the case than with homeowners insurance. Not only will claims on your homeowners policy drive up your rates and possibly render you uninsurable, but those same claims might make it difficult to sell your house in the future. Both insurance companies and prospective buyers look at the CLUE (Comprehensive Loss Underwriting Exchange) report for your home, and the claims reflected there are black marks on your home's record that make it less attractive.

"If a prospective buyer is interested and a Realtor runs a report and sees that there have been two water losses, they might worry there's mold in the house," says Robin Olson, senior research analyst with the International Risk Management Institute in Dallas, as well as adjunct professor in risk management and insurance at the University of North Texas and a CPCU (Chartered Property Casualty Underwriters) Society member.

It's often best to have a higher deductible and set aside money in a bank account to cover small losses, according to Olson. But for big losses, make sure you have ample coverage.

"Standard mortgage requirements are not enough, as we found with the San Diego fires," Olson says, "and many people are not carrying enough coverage." Insurance companies argue their figures are only a recommendation and that their customers should get their own independent appraisal to determine their coverage needs.

How much coverage?

It might well be worth the $150 or so for an appraisal, but you can start by asking your insurance agency how it determines its recommended coverage amount. Insurance companies use quick, easy measures in determinations; however, if your home has eight corners rather than the average four, it will cost more to replace. The same rule applies if you have Spanish tiles or any other higher priced features.

Make sure the insurance company tracks building costs in your community, including materials and labor. This is something insurance companies should do every year, Olson says, but if they are trying to appear competitive, they may not.

You should always have the home reappraised after remodeling and make sure your insurer knows of the improvements. "A lot of times people remodel but forget to tell anyone or don't tell anyone because they're afraid their insurance will go up," Olson says. "I don't have any hard figures on this, but I wouldn't be surprised if one-third to one-half don't advise their insurance agency of home improvements. Let's say that remodeling increases the value of the home by 20 percent, they would be facing a co-insurance penalty because they didn't have the right amount of insurance."

Which policy?

If the insurance company doesn't provide a satisfactory answer about how it determines coverage recommendations, ask if it offers guaranteed replacement cost, which some states require.

Home-based businesses and collections require special consideration. Very valuable baseball cards or bank notes kept in a home safe could be seriously underinsured. Don't forget to cover other structures on your property, such as a tennis court or a really nice wall. And if you're among the increasing number of entrepreneurs who operate a business out of your home, you'll need to explain to your agent the nature of your work to make sure you're properly covered.

Take out a policy with a higher deductible and use the savings from premium costs toward additional coverage if necessary or to build your emergency fund. The higher deductible will make it less tempting to file small claims, which can drive up your premiums or cause your coverage to be dropped.

Remember that flood insurance is available through the federal government, not your homeowners policy. It's always a good idea to get this insurance, even if you're not on a flood plain.


A lot of apartment dwellers neglect renters insurance. Even though most landlords don't require their tenants to purchase coverage, consider $25,000 worth of electronics, clothes and furniture going up in smoke in a fire. A couple hundred dollars toward a renters policy could have covered the loss.

Personal liability coverage -- in case a visitor slips, falls and sues or if your adorable doggy Muffin suddenly has a Cujo moment -- is included in renters insurance.

Do you need auto insurance?

Even though all states have mandatory auto insurance laws, many drivers underinsure inadvertently. Often the required amount of insurance hasn't been changed in years and is too low.

"It's a quandary for the states," says Olson, "because if they require high limits people might not be able to afford it."

How much coverage?

One of the biggest problems, according to Olson, is liability limits that are too low. The standard 20/40/15 policies have been in place too long -- this coverage provides $20,000 in bodily injury per person or $40,000 per accident and $15,000 for property damage. If you run a red light and cause someone permanent brain damage you would be responsible for much more than that in hospital costs alone, not to mention lost wages, pain and suffering.

Raising your level of liability coverage only costs incrementally more. You could bump up coverage by 10 times the amount and it wouldn't even cost twice as much. This could be well worth the investment. "You want insurance for big expenses," Olson says. "Your car has a maximum value. Your legal liability has no maximum limit."

Check out auto insurance rates with Bankrate's car insurance rate tool.

Which policy?

If you drive an older model car you may be able to scale down your insurance. Check the Kelly Blue Book value to see if it's worth carrying collision protection. However, if you're wealthy, buy an umbrella policy as well.

The example Olson draws is if you hit someone and the court awards the injured $800,000 but you only have a $300,000 limit on your auto insurance, normally you'd be out $500,000. But if you have a $1 million umbrella policy, you would be covered. The umbrella coverage might only cost you $200 and it would cover your house too, in case your dog got out and bit someone.

"You should procure your auto, home and umbrella all from the same company," Olson advises. "Not only would you get a discount, there's less chance of acrimonious disagreements between providers, with the insured caught in the middle."

Olson suggests looking at "medical payment" or "personal injury protection" to arm yourself against the underinsured. And he highly recommends arming yourself with uninsured motorist coverage.

Make sure you are getting all of the premium reduction credits, often given for safety features on cars such as vehicle airbags, antitheft devices and antilock brakes, as well as same-insurer discounts for home and car, multi-car discounts, longevity/loyalty discounts, claims-free discount, etc. Availability of these discounts varies by insurer and state. Teenagers make insurance a lot more expensive, particularly young males, who on average have more accidents that tend to be more severe. So check out driver's education or good-student discounts.



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