Finances Part 4 - INSURANCE

The purpose of insurance is to transfer risk. Without insurance, certain losses can bankrupt you.

Umbrella liability policies are a good buy once you have assets. These policies pick up where other insurance leaves off.

There are 7 types of insurance that you need:


1. HOMEOWNER’S OR RENTER’S INSURANCE


It should be “Guaranteed Replacement Cost”. Which means that if you buy a home for $200,00 and it has appreciated to $300,000, the insurance will cover the appreciated amount.

If your house insurance is “extended replacement cost”, you must contact the insurance company once a year to update the amount of the loan coverage to the appreciated amount of your house.

2. AUTO INSURANCE


Carry adequate liability – at least a minimum $500,000

Ask you insurance company for discounts.

Consider dropping collision on older cars, but only if you have enough $$$ in your emergency fund to be able to buy a replacement car – that is called self-insuring. Calculate the risk, if you totaled your car, could you afford to replace it at cash cost. If not, then keep collision on you auto insurance.

3.  HEALTH INSURANCE

To save on health insurance premiums: Increase deductable and/or coinsurance amount. Again by doing this you are self-insuring. If an accident were to happen, and you do not have enough money in your emergency fund to cover the higher deductible, then you can not afford the risk of a higher deductable.

4. DISABILITY INSURANCE OR OCCUPATIONAL INSURANCE

Is a MUST-HAVE! It is designed to replace income lost due to a short-term or permanent disability.

Buy disability insurance that pays if YOU cannot perform the job you are educated/paid to do.

Do not buy policies for less than 5 years. Purchase at least a 5 year policy = Long Term Disability

If Disability insurance is offered at work, BUY IT!

Coverage should be for 65% of your current income.

The elimination period is the time between the disabling event and then the insurance payments begin = deductable. 90 days is = to a $500 auto insurance deductable. Does your emergency fund have enough $$$ in it to support you for the elimination period before the payments kick in? The answer to this question will help you choose the length of the elimination period. The longer the period, the cheaper the insurance will be ~ it’s similar to auto insurance in that respect.

–Are you seeing why it is so important to have a well funded emergency fund?

5. LONG-TERM CARE INSURANCE (Nursing Home/In-home Care/Assisted Living Facility Care)

Do not purchase until you turn 60 years old – but you must buy it when you turn 60.

Talk to your parents, and convince them that they must have this insurance.

A nursing home will crack and scramble the nest egg! The last 6 months of life will be more expensive than the last 10 years of life. You cannot hide assets to keep them from being taken to pay for care… this is lying! If both parents are alive, and one is diagnosed with Alzheimer’s, this parent will be in a care facility for a long time, which will eat up the money in the nest egg, leaving no money left for the other parent to live off. Thus, Long term care insurance is a must to protect the nest egg!

6. IDENTITY THEFT PROTECTION

15 million people have their identity stolen. Don’t buy protection that ONLY monitors the credit report. Good protection will include restoration services and assign a counselor to help clean up the mess.

7. LIFE INSURANCE

Life insurance is to replace income that is lost due to death. ~ It should be called death insurance.

NEVER BUY WHOLE LIFE OR CASH VALUE INSURANCE!!!!!!
ONLY buy TERM insurance.

Term Insurance: Buy a 20 year term. By completing Dave’s 7 baby steps, you become self-insured. So there is no need for permanent whole life insurance.

In 20 years from today, when the kids are grown and gone, you are debt-free (including the 15-year mortgage), and you have investments that have grown to a substantial amount, you will have become self-insured. Thus it is so important to follow the 7 baby steps for financial peace!

You want to stop term insurance about the time the last child leaves the home.

The term life insurance policy should be 10 x your salary. So if you make $50,000 then the policy should be for $500,000. If the policy is paid out due to death, then that entire amount will be invested at 10 % to 12%, and the spouse or children will be able to live off of the interest of the $500,000 – which interest pay out will be about the amount of the salary lost.

Buy only low cost term insurance - a normal price averages in the twenty dollar range.

Don’t forget your spouse. A stay-home mom is worth a $400,000 policy.

Children only need a rider on life insurance, nothing more! The rider will cover burial expenses.

AVOID:

* Redundant policies, like accidental death insurance – no need for it if have term life insurance. Invest the amount you pay for an additional policy – you’ll make more $.

* Credit card protection. Just use scissors and cut up the cards

* Mortgage Life Insurance

* Any insurance with cash value, investments, or refunds

* Pre-paid burial policies. Example: If you buy one of these at age 40 for $3,000, and live to be age 80 – you could have invested that $3 grand in a mutual fund for 40 years and it would have grown to $350,000. Now that would buy a nice funeral!

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Do you have the insurance you need? If not, Dave Ramsey lists agencies that sell insurance that he approves of. Visit his website by clicking here.