Insurance

Insurance provides financial protection whereby the insurance company takes responsibility for the risk of payment in the event a claim needs to be made. In other words: something bad happens to you, but the insurance company will pick up most of the tab, thereby preventing your financial disaster. In exchange, you pay “premiums” on a monthly to annual basis to have this coverage BEFORE the bad thing happens. When it does, you then pay the “deductible” or out-of-pocket cost and then the insurance company will cover the rest. The higher the deductible you’re willing to front, the lower your premiums. It could be in dollars, a percent of the cost, or time. So, a $500 deductible will result in lower premiums than a $100 deductible. And paying less frequently will result in lower cost too. This means you’ve got to get your budgeting game on so that you have the $500 deductible waiting in the wings, and when the premium comes due every 6-12 months, you’ve already been saving for it all along. (We’ll explore how to do this later in the book.) In the case of disability insurance, if you’re only willing to wait for 90 days (3 mo.) before the insurance company starts paying out, it’ll be more expensive than if you can wait 180 days (6 mo.). So having cash in reserve helps here. Again, get your budgeting game on.

There’s insurance for EVERYTHING. It’s a matter of considering “Could I afford to cover the cost of __ happening?” For a lot of things, it would stink, but it wouldn’t be earth shattering. However, the most important types of insurance are as follows:

  • Car – mandated by law, protection against damage caused to or by another.
  • Renters’ insurance protection against theft, damage in your apartment for anything not covered by your landlord.
  • Property may include home, flood, earthquake damage to personal property.
  • Life pays the beneficiary (the person who’s still alive) a set amount of money in the event of the death of the insured person.
  • AD&D – payment of money upon the Accidental Death or Dismemberment of the policy holder.
  • Long-term Disability – provides a percentage of one’s paycheck for a given period of time (say, until age 65) in the event the policy holder becomes sick or injured and is unable to work, to compensate for lost earnings.
  • Health – provides coverage to pay for medical needs, physical and mental included.
  • Long-term Care – pays for costs associated with needed assistance to carry out daily living activities. Depending on the policy type, may be used for nursing home, assisted living, adult day-care, or even in-home care.

Now, word about insurance:

While you hope you may never need it, this stuff, even if not legally mandated, can save your hide. I’ve met too many folks who, upon the death of a loved one, had to pony up money to pay for the funeral, and then didn’t have enough to pay their own rent, or had to move in – with several children – to live with the grandparents (or experienced some other significant financial hardship associated with the lead up and passing of the person). A simple life insurance policy would have covered this expense and allowed those left behind to grieve without also reeling financially.

How much life insurance DO you need? It depends on your circumstances. Someone early in life with no dependents would need a lot less (if any) than a breadwinner with a brood of 5. One way to think of it is to ask yourself: how much would it cost to replace your annual salary or income, and maintain the same quality of life, for as long as the family would have been dependent upon you (perhaps in terms of when your youngest kid finished college). So, that could be 20 years if your kids are young x $85,000 salary = $1.2M to 1.6M (a rough estimate, but not out of the ballpark for 2 partners + 2 kids to pay off mortgage, college, some debts, final expenses, and replaced income). Various insurance companies will have calculators that can show how much you would need. This should mostly be covered, if not fully, by a basic term insurance policy. (Think: term = period of time… and you need it for 20 years, and then you drop it after that, because while it starts out dirt cheap – usually in the tens of dollars per month – it increases each year and will probably be getting pretty expensive to maintain.)

In case you’re thinking “I get this through my employer benefits, so don’t need to buy any more”, chances are you’re only getting $50K to $200K, which isn’t nearly enough. (Plus, we’re changing jobs every few years, and you can’t guarantee you’ll always get that benefit from each employer.) By all means get it – it’s REALLY cheap – but don’t solely rely upon it. Same thing with disability insurance. What you get through your benefits package will cover roughly 50% of your salary (check to see if you’re paying for it or if your employer is, because that determines if the payout will be taxed). If the prospect of getting only half a paycheck when you’re already down and out isn’t appealing, buy disability insurance coverage on the private market to cover most of the remaining amount, netting you up to ~ 90% of your paycheck.

When you get various insurance products through work, you’re participating in a group policy. It will be really inexpensive (say, $1 or $5 out of your paycheck), and there’s no medical tests, since the company presumes not EVERYONE in the workplace will place a claim at the same time. When you apply for insurance on your own, it’s more expensive (it’s just you being insured), and they want to know a lot more about you, including your current health and medical history, occupation (including homemakers), and any risky activities you engage in. If you’re healthy and boring, the cost of the insurance will be much lower than if you’re not healthy, smoking, studying infectious diseases on site, and driving race cars on the weekends. Higher coverage amounts and faster payout periods will also affect the cost. The idea here is to shore up and protect, to prevent taking others down with us when hard times hit. If you’re an entrepreneur on your own, it’s fully up to you to get these portions of protection put in place.

In some cultures, it’s common to have fundraisers to support the family and expenses of a person who’s passed away. This show of collective support is great and a way for the community to express their love. However, these fundraisers generally are not intended to provide ongoing financial support for years on end. More community members will pass and support will need to be diverted elsewhere. For this reason, having life insurance will A) help those left behind to commemorate the life of the person and B) ensure the sound financial footing of the rest of the family so that THEY can support others in the community. Thus, instead of being the source of a crisis, their passing can provide support for others.

Both within and outside the formal insurance industry, there are some great examples of collective protection against individual crisis. Formally, many insurance companies are “mutuals” whereby they are owned by the policy holders themselves. Just like a credit union, they will often have better products and dividends (profits) that then get re-invested into your particular policy (and/or are retained to help the company honor it’s commitments), helping to keep the costs lower. As a member, you get to participate in electing the advisory board, just as you would at a credit union. How do you know which companies are mutuals? It’s usually (but not always) in their name and they’re not publicly traded on the stock exchange. A list of mutual insurance companies in the U.S. and around the world can be found here.

Less formally, organizations exist that find ways of collectively covering financial catastrophes, such as healthcare sharing ministries. Some of these can be quite comprehensive and can provide sufficient coverage to satisfy legal obligations. If you know of other examples, do please share!

In the end, I know that coming to terms with your own mortality, or even imagining that something catastrophic can happen, is a difficult prospect. We don’t like to think about these things. For many, just getting basic estate planning in place is something they don’t want to face. However, it’s necessary, it’s prudent, and it’s the right thing to do. Leaving a mess for someone else to clean up, or over-reliance upon the generosity of others doesn’t help you or them nearly as much as taking responsibility for the welfare of yourself, your family, and your community. Again, this is an example of caring for yourself so you can care for others, the deeper expression of interdependence that we want to manifest in the world.

This book is a work in progress and we’ll all benefit from your input and collaboration. In the “Leave a Reply” below, please post examples, comments, questions, and needed edits. By posting, you grant permission for inclusion of any content to become part of the book, now or in the future, in whatever form it may take. I’ll give attributions to the extent possible. I know sharing about our financial lives can be sensitive, so if you want to share anonymously, please use the contact form instead and I’ll honor your request.

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