On Monday I started a three part series on risk management using insurance products and covered health insurance and long-term disability. Today in Part 2, I'll cover auto and life insurance and my view on what makes sense to purchase.
If you have a car, you are almost certain to be required to carry insurance on it by your state. This usually just means liability insurance so that in the event of a wreck in which you are at fault, your policy will cover the cost of repairs and medical bills. You are not required to carry comprehensive coverage in which you would receive funds for your car in the event of a wreck caused by you or an uninsured driver or your vehicle is stolen or is damaged or destroyed by a storm or “act of God”.
You can’t argue with the liability insurance coverage since it is required by law, but should you carry comprehensive and/or collision coverage? If you have a newer vehicle and you aren’t flush with cash, I would say that it definitely makes sense to carry comprehensive auto insurance. For our policy, the monthly cost to have the additional coverage is $7.50, or $90 a year. That’s it! When you compare that to the cost of replacing a nice vehicle out-of-pocket, it’s more than a bargain.
If you drive a beater that isn’t worth much, then the cost of additional coverage probably isn’t much for you either. You may even be driving a beater out of financial necessity, in which case a car wreck may set you back substantially if an insurance policy won’t cover the damage.
The only time where you may not need to purchase comprehensive/collision is if you are flush with cash and can afford to write a check for a new car tomorrow if needed and not even blink. Not many of us are in a financial situation like that. If I were able to do that, then I’d probably let an insurance company carry the risk of a wreck for me and pay the extra amount for more coverage.
In my opinion, life insurance is probably the most emotionally charged insurance product on the market. If you die, wouldn't you want your family to be taken care of financially in your absence? Of course you would. I am not an expert in all of the various types of life insurance, but I do know that there are several types of products on the market and many agents are eager to sell you a policy that may not be in your best interest because they will receive a large commission from it. I encourage you to read this overview on Dave Ramsey's site that can explain why term life insurance is a better product than cash value insurance.
Once you have a term life policy, you should reevaluate how much insurance you have whenever you have a major life change such as a birth, death (not your own), or major change in income. I'll be changing our policy this year since we have a new baby and my income has increased by a fair amount since I first purchased a policy four years ago.
Next week I'll bring you Part 3 of the series with the last two* insurance products that I currently own.
*Correction: Last three insurance products.