You won’t find insurance particularly mentioned in sacred scripture, but it does stress the importance taking care of one’s family (1 Tm 5:8). In the agrarian-based society of biblical times, one’s land acted as a form of insurance. With the shift to an industrial- and knowledge-based society, the insurance industry has developed various products to meet the need for reasonable protection.
The Aim Is to Minimize Risk
There are five primary types of insurance coverage that are important for us to deal with, including health, home, auto, life, and disability. There isn’t room here for an exhaustive review, so I’ll just touch on some basics. If you’d like to dig deeper into the insurance topic, I recommend reading Insurance for Dummies. While I’m an advocate of reasonable insurance coverage, don’t fall into the trap of overspending in this area.
Remember that insurance is meant to minimize your risk of a catastrophic loss, not pay for all of life’s emergencies. By keeping that in mind, you’ll select levels of insurance that won’t bankrupt your budget.
Health insurance is something I advocate for everyone. Crushing medical-care costs represent one of the primary reasons that people declare bankruptcy. If you’re confronted with a serious accident or illness in your family and don’t have insurance, it doesn’t take long for the bills to mount into the hundreds of thousands of dollars. The prudent person will cover this possibility with an appropriate level of health insurance.
Health insurance policies have become more and more expensive over the years, and today, it can cost over $10,000 per year to pay the full premiums on a typical family plan. Fortunately, health insurance continues to be one of the most substantial benefits employers offer, although many are requiring employees to shoulder more of the cost burden. So when you’re considering various job options, make sure you factor in the level of health-care benefits provided by your potential employer. If your employer doesn’t offer coverage, it’s still important for you to obtain a catastrophic policy that will come with a high deductible, but will at least cap your losses at a predetermined amount.
Smart Home and Auto Coverage
Basic home and auto insurance policies are often required either by your state or lender, but you certainly have the option to carry higher levels than required, and in most cases, that’s a prudent thing to do. Here are some things to look for in these policies:
• With your auto insurance, insure adequately in the event you hurt someone and are held liable for injuries. I would insure for at least $100,000 per person and $300,000 per occurrence.
• Similarly, part of your auto insurance will be for damage you cause to someone’s property. With the increasing cost of cars, I recommend a level of $50,000 for this component.
• One of the more expensive coverages for auto insurance is collision, which pays for damage to your car. It’s smart to select the highest deductible you’re comfortable with in order to save on your premium. You may also consider dropping the coverage on older cars, since the benefit will be limited to the car’s cash value.
• Just as with your auto policies, consider raising your deductible on your home insurance as a way to lower your premium.
• Check your home insurance policy to verify whether certain types of disasters are covered, such as floods and earthquakes. It’s also important that you obtain a policy with adequate “replacement coverage” given the increasing cost of housing. Make sure to take photos of the contents of the home, including furnishings and valuables and keep the pictures in a safe place in order to have proof of ownership.
I remember the story of a woman who had been working with a very large company making a six-figure income. She wanted to leave her work to become a teacher, even though it would mean a substantial reduction in pay. After discussing it with her husband, she went ahead and made the change, but one of the ways they made the budget work was to cancel their home insurance. Given that their home was their largest asset, this decision left them in a very vulnerable position. They would have been wiser to look at other areas in the budget to make adjustments rather than eliminating the insurance on their home. Don’t cut corners like this or you may end up regretting it.
Long-term Planning
Life insurance can be complicated, but by understanding a few basics, you’ll be able to make good decisions. First of all, life insurance becomes a necessity in my view once you have children. As the father of seven, I realize that my family is dependent on my ability to generate an income over a long period of time — probably 40 years given the age range of our kids! It’s my responsibility to do the best I can to provide for them in the event that I die earlier than anticipated.
There are basically two types of life insurance policies: term insurance and everything else. Term insurance simply provides a fixed payment upon death. Other forms of life insurance, including whole life, universal life, and variable life, offer a combination of insurance and tax-deferred savings benefits. In my view, term insurance is the most appropriate type for the vast majority of families. It’s the most affordable option and accomplishes the basics of what you’re looking for — namely, that your family will receive a fixed sum of insurance proceeds in the event of your death. Generally, there are better and less expensive ways for you to save than through a life insurance policy.
Often, a family will only obtain life insurance on the primary breadwinner, but in order to provide the greatest possible opportunity for a surviving spouse to stay home full-time to raise the children, it would be wise to purchase policies for both husband and wife. Otherwise, in the event of the sudden death of the homemaker, the wage earner would need to continue working full time, with the exhaustion and stresses that come with being a single parent.
Another key question is determining how much insurance you need. No one answer fits every situation. You’ll want to take into account your ongoing expenses and future major expenditures, such as debt repayment, college tuition, or the purchase of a new car. By comparing these needs to your existing resources, you can better understand how much insurance is right for you. A general rule of thumb is to start with a figure of ten times your ongoing expenses. The reason for this is that over an extended period of time, you should be able to achieve a 10 percent return on the insurance proceeds. The resulting return should be adequate to cover the cost of those needs without tapping in to the principal. The 7 Steps to Becoming Financially Free — Workbook provides a form to help you calculate your life insurance needs.
Disability insurance is an important form of coverage, especially given the fact that there is a higher probability that you’ll experience a disability than die at an early age. Some employers offer group disability policies for their employees, and this can be a relatively inexpensive way to obtain some coverage. If your employer doesn’t offer a group policy, you’ll have to consider purchasing an individual policy. However, individual policies are quite expensive for the expected benefit. While they certainly make sense for professionals with higher incomes, especially those in the medical profession, it can be difficult for the average family to squeeze into the budget.
Here’s how a basic plan works. You pay an annual premium in order to receive a fixed dollar amount of monthly income in the event you become disabled. The premium will primarily depend on your job classification and your age. Most policies will limit the amount of your benefit to no more than 60 percent of your income at the time of disability, but it may be prohibitively expensive for you to pay for full coverage. Because of the cost, many will need to accept a benefit quite a bit lower than the 60 percent upper limit. While I recommend that most families have at least a base level of disability insurance, I also understand that given the high cost, other priorities may be more important. Take the time to talk about the risks your family faces in the event of a disability and visit an insurance professional to see whether there is an option that’s appropriate for you.
Remember that there are scores of companies that sell life and disability insurance. While price is certainly important, you’ll also want to consider the financial strength of the company you’re dealing with (look for a rating of A or better from A.M. Best, a company that rates the financial strength of insurance companies). As with any purchase, comparison shopping results in great savings. It would be a good idea to obtain a number of quotes before making a decision.
Phil Lenahan is Director of Finance at Catholic Answers and author of Catholic Answers’ Guide to Family Finances. If you have a question you would like Phil to address, contact him at [email protected].
