Keep up the good work, ladies!
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The five wise virgins of the famous ten from the New Testament were prepared when the bridegroom came. They filled their lamps with oil and attended the wedding party. The other five were out of luck. Sorry. Do not pass go. No soup for you! The time for preparation had passed. Like the ten virgins we will all have moments of crisis in our lives and, like the parable, when the crisis comes the time for preparation will be over.
Insurance can help us protect ourselves and our loved ones from the different perils of everyday life. These perils include damage to property (home, cars, etc.), injury or illness, or even death. On the most basic level, insurance is simply the many helping the one. When we buy insurance we are agreeing to pay a relatively small cost (our premium, or cost of insurance) to protect ourselves from something that may have a very large cost. We willingly contribute to a big pool of money from which members of the group are compensated when they experience a loss. Before I discuss some of the different types of insurance, let’s define a few terms first:
- premium: the cost/price of insurance
- deductible: a fixed amount of money we must pay out of our own pockets before the insurance company pays out on a claim
- elimination period: a deductible in number of days; how many days we must pay for a service out of our own pockets before the insurance company pays out on a claim
- peril: the things that cause loss/damage to our property, health, lives, etc.
- limits: the maximum your policy will pay for a certain type of loss
- beneficiary: the recipient of the insurance pay out
Auto Insurance
Auto insurance is designed to protect ourselves and those we may injure in an auto accident. Also, the state says you must have it if you own a car. Find your declarations page. This is a summary, usually one or two pages, that will quickly tell you what coverages and limits you have.
The most important coverage, in my opinion, in your auto policy is your liability coverage. If you damage someone else’s property or injure them physically the law says you are liable for these damages. You have to pay to fix their car, buy them a new car of similar type if their car is not fixable, pay for their ambulance ride, pay for their broken leg, pay them for the number of days of work they missed while injured, and on, and on, and on. If the damages you caused exceed the limits of your policy then you will have to make up the difference from your pocket (savings, IRA, 401K, etc.). I suggest you have bodily injury liability coverage of at least $300,000. If your personal assets are well over $300,000, bump up that limit to $500,000 and get a liability umbrella policy ($1 million, $2 million, etc.) on top of it.
Your deductibles on your auto policy are for your collision and comprehensive coverages. I like to think of my deductibles in the following way: if I have to write a check tomorrow to have my car fixed, how large of a check do I want that to be. If you can comfortably write a $1000 check set your collision deductible at $1000. If that amount is $500, then set it there. The higher your deductible, the less your insurance will cost. You are saying that you are willing to pay for more of the loss out of your own pocket before the insurance company kicks in. This is true for all types of insurance. The higher the deductible or elimination period, the lower the premium. Deductibles are not one size fits all. I tend to get the highest deductible I can afford so I can pay less in premium. Find what works for you.
Life Insurance
Imagine the following scenario. John and Susie are happily married. They have two great kids and one on the way. John has a good job and Susie is able to stay home a care for the children. They aren’t wealthy, but they are able to pay their bills and put away money each month for college and retirement. Well, John dies suddenly. The family is emotionally devastated. What will they do? Not only are they coping with the loss of a husband and father, but they are now facing the very harsh reality that they must go on without John and without his income. The house must still be paid for; they need food, clothes, and electricity; they have some money saved up but after John’s funeral and then living expenses for the next few months they will be out of money. What will Susie do?
Fortunately John had life insurance. Susie, as John’s beneficiary, soon receives a death benefit payment from the insurance company tax free. With that money she is able to postpone going back to work until the kids are older. She can stay home and continue being mom without the added worry of how to provide for her family. The life insurance gives her time and resources to put her life back together. Of course she would rather have her husband and the insurance is no replacement for him, nor will it solve all the difficulties she will be facing. It does, however, eliminate one of the biggest worries she would have had and it helps keep her life intact as much as possible after the loss of her loved one.
Dramatic example? Sure. Can and does it happen? Every day. I believe every parent should carry life insurance whether they work outside the home or not. In our story, suppose Susie had died? Would her loss have negatively affected this family’s financial future? Absolutely. Just ask John as he tries to arrange day care or a babysitter/nanny to care for his kids when he has to go back to work. Life insurance is not about gambling on whether or not you’re going to die prematurely so your loved ones can strike it rich. It’s about being responsible and making sure they’re taken care of even when you’re gone.
Our life insurance needs change as we go through different stages in life. When we’re younger, in the early stages of our careers, just starting to save for the future, and just starting our families, that is when our insurable need is greatest. Most families don’t have sufficient assets early in life to adequately replace the income of a primary or secondary wage earner. And since that income will have to be replaced for a long period of time more insurance is needed.
The best way that I know of to get the most life insurance coverage for your limited dollars is with term life insurance. Term life insurance is a life insurance contract where a specific death benefit is purchased for a fixed premium over a specified term, or length of time (10 years, 20 years, 30 years, etc.). During the term of the policy you pay the same amount every month (or year). If the insured dies while the policy is in force the death benefit goes to the beneficiary. For example, John had purchased a 30 year term policy for $1,000,000 when he was 27 years old. He paid $50 per month for his policy. He died when he was 33 years old. His beneficiary (Susie) received $1,000,000 from the insurance company. She can then use that money to pay off the house, pay off John’s remaining student loans, and pay off the remaining balance on their minivan. She can then invest the remainder and use it to produce income for her and the kids.
Why did John buy a term policy? Well, he needed to purchase the largest death benefit he could with the amount his budget would allow. Also, he knew that by the time he turned 57 (the end of the 30 years), the kids would be out of the house, hopefully the house is paid for or close to it, he would have much more money saved up in his retirement accounts, and his need for life insurance would have changed. He needed to buy as much insurance as he could afford during the period when his untimely death would cause the greatest hardship to his wife and kids.
I suggest that the primary wage earner purchase ten times his/her annual income in life insurance. This is not a hard and fast rule. Get with your insurance professional to do a needs analysis and to take your current assets and liabilities into consideration. You can also look at your budget, determine how much you can afford, and purchase as much coverage as you can get for that amount. It may not be as much coverage as you would wish, but something is better than nothing. As for the other spouse, I suggest buying up to one half of the amount that the primary wage earner would carry. For example, if John makes $100k/year he buys $1,000,000 coverage for himself then they should buy up to $500,000 of coverage for Susie. For a couple in good health, this type of coverage can be purchased for around $100-$200 per month (that’s for the both of them!), sometimes even less.
Other important coverages
If you’ve made it this far I congratulate you! I don’t think I would have. I’ll wrap this up by mentioning two other important, often overlooked coverages: disability insurance and long term care insurance.
Disability is designed to replace your income if you are unable to work in your job due to injury or illness. So, we might not die in the prime of lives, but we might live without the capability to earn money. Statistically, we are more likely to become ill or injured and not be able to work than to die prematurely. Disability insurance will pay us a percentage of the income we were earning prior to our illness or injuring for the duration of the disability. This type of coverage is often offered through employers, but if not, all primary wage earners should look into it.
Lastly, for our more seasoned readers (55-70), you may be at the stage in life to consider long term care coverage. This type of coverage pays a daily benefit to cover the costs if we ever need assistance with performing the activities of daily living (dressing, eating, transferring, toileting, etc.). We all know or have cared for someone who has needed this type of care. This care can be received in a nursing home, assisted living facility, or even in our own homes. It is expensive. It is very difficult on families. It is not fun to think about. However, it is a reality. I will briefly share an example.
My grandfather worked hard his whole life, saved his money, and was able to retire with some sizeable assets. He also knew that all eight of his older siblings suffered from Alzheimer’s disease. Even though he potentially had sufficient assets to pay for the care that he might need in the future, he did not want to dispose of them that way. He wanted to pass some on to his kids if he could. He purchased long term care coverage, hoping he would never have to use it. At age 86 he was diagnosed with Alzheimer’s and needed part time care at first, then full time care soon thereafter. He lived 5 more years in that condition, but was able to receive excellent care the entire time, plus he was able to pass on his assets, largely intact.
He bought the coverage for asset preservation purposes. However, most people who buy long term care coverage by it so they will not become a burden on their families. That word “burden” is an ugly word. Most of us would do all we could to help or parents if they needed long term care, and would never call it a burden. But most parents don’t want to be cared for by their children if it can be avoided. They see it as being a burden. Long term care coverage can be affordable. But like all of the coverages we’ve discussed, you must get it before the crisis comes (when your budget and health allows).
In conclusion, talk to your insurance professional, wise older sibling, or even me if you have questions about insurance coverages. Again, my comments are not meant to be comprehensive nor are they right for everyone’s situation. However, I do feel strongly that as providers for our families (I’m talking to fathers and mothers, husbands and wives) that we need to do all we can to care for those most important to us. Don’t get caught with an empty cruse and get left out of the wedding party! And who doesn’t like a good party?
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