Have you ever felt like you were over-insured? No one wants to waste money on unnecessary insurance premiums because every dollar wasted is a dollar that could have been invested or spent on something a lot more exciting than insurance.
On the other hand, not having the right types or amounts of insurance can be very detrimental to wealth building and enjoyment of life. How can we find the proper balance? The key is to cover only the potentially catastrophic risks we cannot completely avoid. The following types of insurance cover risks in that category:
- Auto Insurance
- Homeowners Insurance
- Umbrella Liability Insurance
- Medical Insurance
- Long Term Disability Insurance
- Long Term Care Insurance
- Life Insurance
These types of insurance are critical because uninsured losses we may experience in these areas have the potential to financially devastate us. For example, if we carried only the minimum required auto insurance liability limits and seriously injured or killed someone in a car accident, how would we pay for the vehicle damage, medical expenses, and income loss of the other driver, which could add up to hundreds of thousands, even millions of dollars? How could we pay medical bills for unexpected cancer treatments, surgeries, and long-term hospital confinement if we had no medical insurance?
Many years ago I met a man in his fifties who had incurred hundreds of thousands of dollars in medical bills twenty years earlier because his wife had developed a serious illness at a time when they had no medical insurance. She eventually recovered physically, but he told me he does not think they will ever fully recover financially from the effects of that huge unexpected blow. He pleaded, “Make sure you always carry medical insurance for your family and tell all your clients to do the same. I severely underestimated the potential for medical bills to wipe us out financially for the rest of our lives.”
If we choose not to have insurance in any of the areas listed above, we need to create a realistic plan for how we would cope if disaster struck. For example, if we choose not to acquire disability insurance, we would be foolish to say, “I do not need it because I am never going to get sick or hurt.” Of course no one ever plans to get sick or hurt. It happens when we least expect it.
A realistic alternative plan might be the following: “If I cannot work because of sickness or injury, we will move in with my in-laws and use our retirement and college savings to pay for my wife to go back to school so she can earn enough to support us. We will no longer help our children pay for their college education, and we will postpone retirement for another 10-15 years beyond what we originally planned for.” If we cannot think of an alternative plan that is realistic and acceptable to us and those who financially depend on us, then transferring the risk to an insurance company might be the best strategy.
In my opinion every other kind of personal insurance is optional: dental insurance, short term disability insurance, accident insurance, home warranties, extended warranties on cars and appliances, credit insurance, travel insurance, and many others. These are nice to have if someone else is paying for them, but the premiums tend to be very high for the benefits provided, and no loss in any of these areas has the potential to ruin us financially. Therefore, if we are underinsured in the essential areas but are paying for coverage in optional areas, it may be wise to terminate nonessential coverage and use the premium savings to increase critical coverage.