• Buy Insurance You Need, Not What You're Sold

  • Buy Insurance You Need, Not What You're Sold

  • You can buy insurance on just about anything. But for your personal financial protection and that of your family, you'll probably need to think, at least, about life, disability income (DI), critical illness (CI), accident insurance and long-term care (LTC). This assumes that you've already got basic health insurance under control from your job or elsewhere, as well as auto and homeowners insurance, if you own a car and a home.

    First, some general principles:

    • Your insurance needs will evolve based on your family situation, financial resources and health status. Getting the insurance protection you need is anything but a "one and done" proposition; a periodic review is essential.
    • An insurance policy is a legal contract: you agree to pay an amount of money in exchange for the possibility of receiving money back under prescribed circumstances. Patience is required to learn what you need to know before making a purchase decision, because there's a lot of fine print to get through.
    • Prices can vary considerably from one insurance company to another, but it's not always easy to make "apples-to-apples" comparisons. Two policies issued by different insurers are rarely the same.
    • Your age is often a big factor in the cost of most kinds of health-related insurance. Other things being equal, the longer you wait to buy insurance, the costlier it will be.
    • The cost of insurance is proportional to the probability that you'll file a claim. That's why, for example, an average LTC or DI policy is more expensive than a term life policy.

    Life is full of trade-offs, and so it is with insurance. Only you can decide how to balance your or your family's need for financial security against other things you could buy or invest in if you didn't have as much insurance.

    Setting Priorities

    The basic way to prioritize your insurance needs is to try to assess the financial consequences of different hazards in your life. For example, if you're young and single and were struck by lightning and killed, your friends and family members would be deeply affected. But unless they're depending on you financially, your death wouldn't create a financial hardship. If instead you're married, have young children, are the primary earner and have only limited savings, that's a different situation entirely.

    Keep in mind that the older you are and the more health issues that crop up, the higher the life insurance premiums. They can rise so high they're unaffordable, or you might even be unable to buy insurance at any price. Therefore, there are times when buying a life policy before you need it might make sense.

    Here's another scenario no one wants to face. If you're young and single, have only limited savings and have a serious accident that keeps you from work for several months, you could be in deep financial trouble after you've burned through your paid vacation and sick leave. That's where DI comes into play. It replaces a portion (often it's 60%) of your income. That would also be very helpful if you have dependents.

    Covered Calamities

    CI and accident insurance are also designed to help out in this situation. These policies simply pay you a flat sum of money per covered accident or illness. How you spend it is up to you. Typically, the cost and benefit levels for these policies are relatively low and more attractive to people with limited savings. CI policy benefits are triggered by conditions like heart attacks, strokes, cancer (not necessarily all types), coronary bypass surgery and organ transplants.

    You'll need more than a stubbed toe to file an accident insurance claim. Accidental injury categories that are typically covered include fractures, burns, lacerations, concussions, dislocation, eye and dental injuries, and accidental death (that is, death not caused by a disease) and dismemberment.

    Often the brunt of expense you'd incur with a serious accident or disease is medical in nature and should be covered by health insurance. CI and accident policies provide a little something extra, for example, for health insurance deductibles or travel expenses for family members to visit you if you're recovering in a hospital far from home.

    LTC coverage varies widely by price and benefit formulas. Naturally, the older you are when you first buy a policy, the higher the premiums. In recent years, several insurance companies pulled out of the LTC market. The reasons? They found it too difficult to predict the claims they'd have to pay, under-charged many policyholders and lost money. Coverage is still available, however, and insurance companies reserve the right to raise premiums after you've purchased a policy.

    In addition to assessing the financial consequences of each category of misfortune covered by these different insurance types, you should factor in other financial priorities, such as retirement savings. Few people can afford to insure against every risk, while also saving for the future. It's a lot to think about, but an objective financial professional can assist you with the process. In the end, you'll likely be buying the insurance coverage you need most and not simply having it sold to you.