Starting Out

Insurance Everyone Needs

It may be confusing, expensive and about as exciting and watching paint dry, but insurance is a financial tool you simply can't afford to go without. Get the coverage you need without breaking the bank.

By Erin Burt, Contributing Editor, Kiplinger.com

February 10, 2005

Insurance is the toilet plunger of personal finance. Ninety-nine percent of the time you don't want to touch it, look at it or talk about it. But when you need it, you sure are glad it's there.

Nobody wants to buy insurance. It's confusing, expensive and about as exciting as watching paint dry. Plus, you could spend money for years on premiums and never file a claim.

So why bother? Two words: What if.

What if you came down with a life-threatening illness? What if you totaled your car? What if you lost everything you own in a fire?

Still think you can't afford insurance? Well, if you don't have the money to cover these losses on your own, you can't afford not having it. And there are plenty of ways to minimize the costs of covering your life, health, car and property.

Get a life (insurance policy)

Not to be a downer, but have you thought about death lately?

If you have a family or someone else who relies on you for financial support, your passing could be financially devastating. Buying a life insurance policy is a good way to provide for your survivors after you're gone.

But not everyone needs life insurance. Sad as your death would be, if you're single and childless you probably don't need it because no one relies on you to bring home the bacon. Buying coverage while you're young to lock in low rates might not be the best use of your money either. Consider the interest you could earn by saving and investing your money instead of spending it on insurance premiums.

Married couples without children may need little or no life insurance, especially if both spouses earn income. If one died, the other would presumably survive on his or her own income. Still, funeral costs could be a strain, as well as trying to make mortgage payments or pay credit card bills on one income. Assess your financial situation and consider buying a modest amount to protect the other.

If you have young children, though, life insurance is a must. Even if you have a working spouse, the added strain to the daily finances may be too much for the survivor to handle -- not to mention the blow to his or her ability to save for the kids' college. Even stay-at-home spouses may need their own policy to help pay for childcare in case of their death.

If you decide to buy a life policy, figure out how much coverage you need. A good rule of thumb is to get enough to equal four to five times your annual salary. For a more accurate estimate of your needs, though, use this calculator.

If you're young and in good health, you can get a lot of coverage for a good price. For example, we searched InsWeb.com for a policy for a 28-year-old woman in excellent health, and found a $500,000 policy that's good for 20 years and cost $260 a year, or $22 a month. Learn more about shopping for life insurance and selecting the right policy for your needs.

Here's to your health insurance

You're young. You're healthy. You have all your teeth and a bladder in fine working order. What do you need health insurance for?

Protection.

Without it an unexpected illness or medical emergency could mean financial disaster. According to a recent Harvard study, about half of all people who file for bankruptcy do so because they can't afford to pay their hospital, doctor or prescription bills.

Your parents' health plan typically covers you if you're a full-time student until you turn 23. After that, unfortunately, a lot of young adults take a gamble and go without.

The cheapest and easiest way to get health insurance is through your employer. But even if your job doesn't offer it, or you're self-employed or between jobs, you can still find affordable health insurance on your own. You can get quotes on individual policies at eHealthinsurance.com. If you're graduating in the spring and won't have a job lined up immediately, consider short-term insurance through a student health plan, or check out the offerings from Fortis or Golden Rule.

But whether you're choosing from an employer's offerings or an individual provider's, you'll need to weigh the costs and benefits of the different plans.

First, find out if there are any deductibles that must be met before the plan starts covering costs. And once the deductible is met, what percentage of costs will the plan pay? Will you have any co-payments? What will it cost to see a doctor outside the plan? Is there a lifetime limit on what the plan will pay?

Then, evaluate your health, family and financial situation.

If you're single and in good health, you can save money by opting for a low-cost, high-deductible plan that provides coverage primarily for major procedures. A health savings account is a good vehicle for managing your medical costs under such a plan because it allows you to stash enough pre-tax cash to cover your deductible. To qualify for an HSA, your policy must require a minimum deductible of $1,000 for singles or $2,000 for families.

If you have small children, you might want to pay a little more for a plan with low or no co-payments so you won't have to shell out cash for the frequent visits to the doctor. If you or a family member have a chronic disease that requires expensive treatments, it's important to find a plan that covers a large percentage of costs and that has a high lifetime limit on payouts so you won't have to foot big bills. Get more tips on understanding your health insurance options.

You auto get car insurance

Accidents happen. In cars, they happen nearly 100,000 times a day.

Buying car insurance is not only a smart idea, it's the law. Nearly every state requires some level of coverage for your set of wheels.

In general, plan on paying a base rate of $100 a month, or $1,200 a year. Your premium could be lower or much higher, though, depending on a number of variables including your location, driving record, type of car and age. The good news is, your rate probably won't be as high as it was when you were a teenager. But the "age penalty" doesn't entirely disappear until around age 25.

Before taking on your risk, insurers like to know you're responsible, so they may also base your rate on your credit report. Make sure yours is in tip-top shape.

The key to getting a deal on your car insurance is to shop around. In fact, it's a good idea to re-shop your policy every year to see if you can get a better bargain elsewhere.

Another way to save money is to review your current policy. You might be able to cut back coverage on an old car that has decreased in value since you first bought the policy. Or, consider increasing your deductible. This transfers more risk from the insurer to you, so make sure your finances could withstand a large unexpected cost. For example, if you'd have to use your credit card to pay a big repair bill, you could end up paying hundreds more in interest than you would have shelled out in premiums with a lower-deductible policy. Learn more ways you can trim your rate.

You've seen the commercials about how easy it is to shop for car insurance online. But when you go to the different sites, they start using a cryptic form of insurance-speak. They ask you questions like how much bodily injury liability, collision and medical coverage you want, followed by a series of big dollar amounts that look rather intimidating.

Relax. Check out our Guide to Auto Insurance. We give a line-by-line breakdown of coverage and translate the lingo for you.

Even if you don't have a car, you might want to look into buying a non-owner car insurance policy if you rent or borrow cars often. It'll cost you about $300 a year, or $25 a month. For occasional use, check with your credit card issuer to see if it provides car-rental insurance before you buy a policy from the rental company.

Home sweet rental

Nearly two-thirds of renters don't have any protection for their belongings in case of theft, fire or other disaster. But unless you have enough money saved to replace everything you own -- clothes, furniture, computer, entertainment system, microwave, etc. -- it's definitely worth the cost.

In college, your parents' homeowner's policy covers your stuff while you live in the dorms. But once you move off campus, either as a student or after you graduate, you need your own coverage. Some landlords may even require renter's insurance before you move in.

No matter how pathetic your entry-level salary, you can probably scrape enough together to buy a policy -- expect to pay $150 to $250 a year, or $12 to $21 a month. You may pay more or less depending on your neighborhood and level of coverage.

You can get quotes from several companies online at InsWeb.com or NetQuote.com, but check with your auto insurer first to see if you can get a discount for having more than one policy with the company. When I graduated from college, I essentially got my renter's policy for free because my insurer discounted my auto rate by the same amount as my renter's premium. I've since increased my coverage and moved to an area with much higher insurance rates, but the multiple-line discount still knocks about 25% off the cost of my renter's policy.

You'll want to buy replacement-cost coverage, meaning the policy pays enough to cover the cost of replacing your stuff, instead of paying what it's worth when it's stolen or destroyed. To figure out how much coverage you need, take an inventory of your belongings and estimate how much you paid for everything. To guide you through the process, print out the home inventory worksheets from State Farm's Web site. Should you have to file a claim, your list will also expedite processing and verify your losses for tax purposes.

Your policy also comes with liability coverage in case someone is injured while in your apartment, or elsewhere by you or your pet. You'll typically choose between $100,000 and $300,000, but you can purchase more coverage if you want.

If you own your own home, you probably already have homeowner's insurance. Make sure you don't have any gaps in your coverage, and find out how you can protect yourself from rising rates.

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