Monday, December 2, 2013

What You Should (AND SHOULD NOT!) Insure

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Okay, we have officially left the realm of "What is absolutely the only correct way to do things" and entered the land of "What Lisa believes, due to what she was taught by her CPA dad, college personal finance professor, and a bunch of other really smart people." Meaning, this is my own personal opinion. What you decide to insure or not insure is your personal decision since you're the one who will have to live with the consequences so don't sue me. Seriously, don't. :)

So here is my take on what you should and should not insure. It can be summed up in one brief sentence: INSURE ONLY WHAT YOU CANNOT AFFORD TO LOSE.

What do I mean by that?
Some forms of insurance are VERY important. Essential. As in, if you don't have them, you need to re-work your budget to include them. But that doesn't mean you need to have every kind of insurance and warranty for everything you ever buy. But in case you don't trust me, here are the words of a really smart personal finance professor, Dr. Bryan Sudweeks (source):

"Insure yourself against events that would have a major economic impact on you or your family. Self-insure against events that would have a smaller economic impact. Balance your need for insurance with the cost of the insurance. The goal is to use insurance to provide funds in those most adverse circumstances where your personal resources would not be sufficient. Also, to self-insure requires savings sufficient to handle the lower-severity surprises that life brings." (emphasis added)


What does it mean to "self-insure?" That means rather than buying warranties and insurance for every little thing, you should pool and save that money so you can afford to replace those few things that are broken or lost before their time (and save money in the process).

So, what can you not afford to lose? I guess that depends on your personal and financial situation, but in my mind,

You Need Insurance For:

- Your home.
- Your car. This is a whole topic in and of itself, but even if your car is a total junker, you should (and must by law) still have liability insurance to protect against any damage your car might do to others or their property.
- Health. Obviously this is a hot topic right now, but having just had a baby, I can tell you that hospital stays, even short ones, can get cray-cray expensive, crazy-fast. Yes I just said "cray, cray" and yes, you need some form of health insurance. I don't care how healthy you are.
- The Income of a sole provider. We are talking about life insurance and disability insurance. Lauren has posted about life insurance here and here. Don't have life insurance on someone in your family? You must not need their income. Because if you do, get life insurance for them. Now. Term insurance is very affordable (shop around!) and meets the needs of a lot of families. Think you can't fit it into your budget? What would happen to your budget if you no longer had ANY income? Time to change your budget and cut something else out because you cannot afford NOT to have it.
p.s. Think you don't need a life insurance policy because your spouse's employer provides some life insurance? Do you know exactly how much life insurance is provided for free or low cost? That amount is often only $50,000 (not per year, $50,000 TOTAL). So think again. Here's a calculator to help you figure out how much life insurance you need. I'm guessing you need way more than $50,000.

You Do NOT Need Insurance/Warranties For:

- Crazy expensive life insurance. Once again, this is a personal choice, but we decided we only needed a term policy long enough to allow me to stay at home with my kids while they were still in school (so, 20 years). After that, I'd go back to work. This made our insurance policy relatively cheap.
- Consumer goods. Do you know why Best Buy always tries to sell you on warranties? It's not because they love you and want what's best for you. It's because they make a ton of money off of them (Don't believe me? Feel free to read their financial statements). This is one of those things that we almost always "self-insure" against. I'm not going to make a blanket statement and say you shouldn't buy any warranty or insurance ever because it depends on (a) how much the warranty costs (b) how good the coverage is and (c) how likely the product is to break. So in some ways, you can think of warranties as an additional cost for a crappy product. In which case, do you really want to buy that product? More on the warranty debate here.
This means we didn't buy any additional insurance for even my engagement/wedding ring. *gasp*, right? Not really, when you think about it. Of course, I'm so practical, when we starting talking engagement, I begged my husband to buy me a sterling silver Walmart ring and put the rest in a mutual fund so we could send one of our kids to college with it. Ever the practical accountant. :) Luckily my husband ignored me and bought the real thing.
**Also remember: You may already be covered by other types of insurance (home, rental) or through your credit card. Most credit cards offer 90 day purchase protection for most items purchased with your card that are damaged or stolen (note there are limitations, so check your particular credit card).
Picture taken on Corona Del Mar Beach just minutes before Bryan proposed back in the day. I'd defend my bright blue hoodie/bright pink track suit combination by saying it was really "in" back then, but ... it was never in style. But props to my husband for vowing to love me forever, even in my fashion-challenged state.



Okay, Mac People, speak up. Apple Care: Worth it? Or not?



 Any insurance questions? Questions about credit card protection? Put them in the comments so we can answer them there or post about it in the future.

 

3 comments:

  1. Great post. Thanks. So, I need more of the basics on life insurance. I need it if I'm not working so that I can get money in case my husband dies? I love what you're doing here, Lisa!

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    Replies
    1. Thanks, Natalie! Lauren wrote some great posts about life insurance here:
      http://www.moneyhipmamas.com/2013/10/life-insurance-term-vs-cash-value.html
      -and-
      http://www.moneyhipmamas.com/2013/08/life-insurance-not-just-for-1-percenters.html

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  2. Chiming in on AppleCare. I purchased it for my previous and new laptop. I do not use the technical support much (yet), but I did need things replaced in my old laptop (power cord, disc drive, and other things I can't now recall). When I added the cost of service/replacement parts, it was significantly more than the price of the plan; I did come out ahead. I think it could be a self-insureable item, though. I purchased AppleCare the second time because I may have similar issues, but I also planned on using tech support more.

    I should probably note that this is the only device insurance I have ever purchased and that I do not have it on my iPad (which incidentally needed a repair that AppleCare did not cover).

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