INSURANCE; UNPLANNED EXPENSES AND PERSONAL FINANCE, THE MAIN REASON PEOPLE GO INTO DEBT

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7.2 INSURANCE; UNPLANNED EXPENSES AND PERSONAL FINANCE, THE MAIN REASON PEOPLE GO INTO DEBT

People buy insurance so that they won't be devastated by the high cost of unexpected catastrophes. Expensive surgery, a house fire or a car accident could ruin most families.

However, I believe that many households often buy too much of the wrong insurance and not enough of the right insurance. Just owning an insurance policy does not protect you. You must have the proper coverage. Car insurance, for example, should include underinsured or uninsured motorists, while collision insurance for older cars may be a waste of money.

Generally most people should have health insurance, home owners or renters insurance and car insurance. The bread winner in a family with young children should have low-cost (term) life insurance.

A general rule of thumb is that you should buy a policy with the highest deductible that you can live with. This means that you could pay that deductible yourself if necessary. You will save a lot of money raising the deductible and I strongly suggest that the money you save should be automatically deposited into a savings account earmarked for covering any out-of-pocket insurance expenses. Over time many people will be able to accumulate a considerable savings account this way.

On the other hand, you should make sure that you are adequately covered for any likely catastrophes. If you live in an area that could flood, you should have flood insurance, for example. People with homeowners or renters insurance should have a policy which covers the current cost of replacing their belongings, otherwise the contents of the house may only be covered at their depreciated value.

Here is an example of how I saved money and got better coverage at the same time: I raised the deductible on my homeowners policy but at the same time added replacement cost coverage. The total price of the policy was less than I had been paying.

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