What is the value of insurance?

AJ: For most of us, insurance is a sometimes-legally-required, income sucking vortex that you rarely actually tap into for your benefit. HOWEVER, it only takes one too-close-to-home story to force your eyes open to the benefits of insurance, and as is true with all financial decisions, pre-planning is key to ensuring you have the power of research and time on your side when selecting the right insurance for you and your family.

KJ: Insurance is a tool to help cover catastrophes that may occur – plain and simple. It’s not to get a sudden windfall or profit in the event of a disaster. In fact, it’s basically a zero sum game (technically negative sum game if you subtract out the profits that the insurance companies make). So, why purchase insurance?

I buy insurance for the same reason I buy lottery tickets: "what if"

It helps cover you in the event of a disaster
Whether you get in a car accident, have a damaging windstorm pass through, or have a fire, chances are you won’t be able to rebuild to new on your own. That’s where the insurance policy comes into play. It helps make you whole (or close to it depending on what types of policies you have) to get you back on your feet since it would likely be difficult (to impossible) to do so on your own.

Insurance is not for minor emergencies or slip-ups
Insurance is not used to repair that broken window, fix the siding that’s peeling on your house, or any other “routine maintenance” that crops up. Those are up to the homeowner to periodically take care of on their own. Don’t expect anything minor to be covered by insurance as you’re deductible is designed to push some of those costs on to you. Otherwise, we would get the insurance company involved for EVERY little thing and thus drive up costs for all.

It’s designed to be a cost sharing mechanism
Your regular premium payments essentially begin to “front load” the payout you may get at some unknown date in the future. In fact, a lot of smaller insurance payouts are simply giving you your money back after years of paying in! Furthermore, most insurance policies have you pay for a certain amount of the costs out of pocket (known commonly as a deductibles, copays, coinsurance, etc.), and you may even share in a portion of the costs above a certain limit. If you’re fortunate enough to not have to file a claim with your insurance company, your premiums are essentially going to pay for the payouts for those less fortunate – you generous gifter, you!

Bad luck might be following you
Unless you can predict the future and know exactly when something may happen to you (please call me, as that would be quite handy in my profession), then it’s important to plan for the unexpected. You could run into a string of unfortunate events (natural disasters – not all are covered under your policies though), and it could be just what you need to help get you back on your feet, so you’re not derailed permanently. Whether it’s a car accident, storm that rolls through and damages your home, or sudden disability derails your plans, you never know when life will happen and what it may bring, so do your research on the coverage you and your family needs.

It can give you much needed peace-of-mind
Knowing that certain catastrophes are covered by your insurance policy may help you sleep a little better at night and worry a little less about something unknown derailing you and your family’s goals. It could cause you to side-step a little bit (as you have a deductible to pay afterall), but it helps with the peace-of-mind to know that you won’t lose it all.

So, where do you go from here?

    Find a deductible that’s right for you
    First and foremost, make sure you build $1,000 in your emergency fund (once that’s reached, look to build 3-6 months of living expenses in a highly liquid savings and/or investment account). Then, based on your situation with how many cars you have, whether you own or rent, etc. you should look to have a deductible that’s reasonble, but not too low. I’m not a fan of having a deductible for cars or homes any less than $500 (much higher threshold for medical expenses) as you’re just throwing money away each month if your deductible is too low. Do a quick analysis on the premium savings you could see by raising your deductible to the next threshold. If it costs you an extra $150 per year to have a $500 versus $1,000 deductible, what are the odds you’ll have a real worthwhile claim within the next three years? If the answer is ‘slim’ then raise that deductible and keep the premium savings to yourself. Use the extra savings to build up your emergency fund and be able to put you on even better footing in the long-run, so you’ll be even more equipped to deal with the unexpected.

    What coverage types do I need?
    At a minimum you should have auto insurance (most states legally mandate a minimum amount of coverage), homeowner’s (or renter’s) insurance, and health insurance (soon to be mandatory thanks to the Affordable Care Act), but you should also look to have some other core insurance policies: life insurance, disability insurance, and long-term care insurance (particularly as you get older and are approaching retirement) – of course the coverage amounts and types of policies may be different from situation to situation. So, if you don’t have any of the coverages listed above, now is the time to speak with an insurance agent to start getting coverage. Be sure to shop around too as not all policies or companies are created equal!

Now it’s YOUR turn to reflect:

    What role does insurance play in your life?
    What are your views of insurance?
    What policies have been critical in your family’s life?

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