It is tempting to skip buying insurance if you’re living on a budget. After all, why spend money for something that you cannot hold, and does not fulfill the basic needs of food, clothing or shelter.
What you get when you buy insurance is protection from financial catastrophe. When financial catastrophe strikes, all of your careful budgeting and hard work to attain your financial goals go down the drain. The worst financial disaster can even lead you to bankruptcy. But even a minor disaster can make you lose everything without adequate protection of your income, health and assets. Perhaps you will not appreciate having insurance until you find yourself in a situation where you need it.
But with limited budget, the question is, what should you insure?
Insure against anything that you cannot afford to lose. Give low priority or ignore altogether insuring against the small stuff even if it has a greater probability of occurring, especially if the insurance is expensive relative to what it is protecting.
If you absolutely cannot afford insurance, the best thing to do is to avoid or limit risk. You can do this, for example, by eating healthy foods and exercising to extend your life, not driving to the office to avoid car accidents, and putting smoke detectors in your home that warns you of fire.
There are three important things you should protect with insurance to avoid financial devastation:
1. Your income
Your family depends on your income to survive, therefore it is important to protect against the loss of your income when you die. There are two ways you can lose your ability to earn income – premature death and long term disability. You can protect against these by getting life insurance and long-term disability insurance.
Life insurance protects your ability to generate an income to support your family, or if your spouse is not working, to cover what it would take to hire someone to do the services if she died. You do not need life insurance if you are single, or you do not have anyone dependent on your income.
There are two types of life insurance. Term insurance is the cheapest, because it only protects you within a specific amount of time, typically 10 to 20 years, until your dependents are able to earn their own income. The other type, whole life, lasts as long as you pay the premiums and builds “cash value”, but is much more expensive.
Long-term disability insurance protects your income for yourself, and also for your dependents. If you are completely disabled and cannot work, you have a bigger financial burden to pay for your special needs, as well as for the survival of your dependents.
Most disabilities are caused by medical problems such as arthritis, heart conditions, hypertension, and back/spine or hip.leg impairments. Most of these problems cannot be detected in advance, especially those caused by accidents. The chances of this happening may be remote, but these do happen.
If you are married and your spouse earns enough income for your family to survive, you can probably skip long-term disability insurance. This is also true if you have accumulated enough money for your future.
2. Your health
Medical expenses are very expensive. Without health insurance, a hospital visit or a serious illness can easily wipe out your savings and put you deep into debt. Thousands of individuals file for bankruptcy because of medical bills.
Health insurance is an absolute necessity not only for your financial health, but also for your well-being. Health insurance saves you from hesitating to go to the doctor. Many people who have no health insurance tend to go to the hospital only when their illness becomes too serious to treat, instead of being treatable in the early stage. Oftentimes the disease becomes fatal.
Many people are able to get their health insurance through their jobs. Others have to buy their own health insurance like when they are self-employed, employed by small businesses that do not provide health insurance, or they retire before the age of 65.
The recent Health Reform Bill was passed to make sure that everyone has health insurance.
Your health insurance should cover the big expenses – hospitalization, doctors and medical charges such as x-rays and laboratory work. If you are a woman planning on having children, get an insurance that has maternity benefits.
3. Yourself, your property and your assets
Homeowners insurance protects your home – probably the most valuable asset you own, therefore the single important asset that needs protection.
Lenders require you to get home insurance if you have a mortgage on your home. Even if your house is not under mortgage, it is still a good idea to have a policy. Thousands of people are killed and injured by fire each year. Other homes are severely damaged or destroyed by windstorms, tornadoes, hail, and other disaster.
Homeowners insurance provides you with enough money to rebuild your home when these disasters strike.
Homeowners insurance can cover the following, and you can choose which home disasters you want to protect against:
- Structure – Covers damage to or destruction of your residence. (Note: This coverage does not apply to renter’s insurance policies.)
- Detached Structure – Covers damage to or destruction of detached structures. (garages, barns, swimming pool.)
- Personal Property – Covers damage to, destruction of, or theft of personal property
- Living Expense – Covers the added living costs you incur as a result of a loss covered by property destruction (meals, hotels, etc.)
- Liability Protection – Covers medical payments to guests injured on your premises, regardless of fault.
Homeowners insurance do not protect against earthquake damage, flood and surface-water losses. Consider buying earthquake and flood insurance if your area is prone to these disasters.
If you are a renter, consider getting a Renters Insurance. It covers the perils protected by homeowners insurance, except for structural coverage. This is because as a renter, you do not own the structure you occupy.
Your personal automobile is the single largest possible cause of catastrophic lawsuits against you for property damage, major injuries, and even death. If you drive a car, you should have auto insurance.
The law requires some form of automotive insurance in most states, but you may want to have more protection than the minimum required by law.
Auto insurance covers a variety of catastrophe in a single policy. This includes:
Liability: The bare minimum you can buy, and required by most states. Protects you from the financial disaster caused by being in a wreck and sued for injuring or killing someone. Make sure that you have enough bodily injury liability insurance, which pays for harm done to others, to cover your assets. (Coverage of double your assets is preferable.)
- Collision: Covers damage from colliding with another object (for example, a vehicle, post, or curb), regardless of fault
- Comprehensive (also known as other than collision): Covers most other kinds of accidental damage to the vehicle, such as fire, theft, vandalism, glass breakage, hitting a deer, wind, or hail.
- Uninsured/Underinsured Motorists: If a motorist with no insurance or not enough insurance hits you, this coverage kicks in and pay for the damage. This coverage allows you to collect for lost wages, medical expenses, and pain and suffering incurred in the accident.
- Personal Injury Protection: This pays medical expenses and lost wages for the driver no matter who is at fault.
- Medical: This covers the insured person no matter who is at fault.
If you have a comprehensive health and long-term disability insurance, you would probably not need uninsured or underinsured motorist liability coverage.
Also, when your car ages and loses its value, you can remove comprehensive and collision coverages.
Rental car, boat, and RV insurance are other types or vehicle insurance you should consider if you have these.
Long-term care insurance pays for the help you need when you would have problems doing normal daily activities over a long period due to physical or mental impairment. Consider it if you need to protect your assets from being wiped out when you need to stay on a nursing home for a long time.
What You Don’t Need To Insure
Avoid insurance when the risk is small in relation to the amount of the premium. Do not get fooled into thinking that just because a policy costs little, it is worth getting. Typically, these policies also cover little. They are priced low because they do not cover large potential loses.
Avoid any insurance that only covers part of the risk. Instead of getting accidental death insurance, get the more comprehensive life insurance. The same is true for travel accident insurance, cancer coverage, and other limited coverage.
You also will also find banks and credit card companies pushing credit life and credit disability policies to you. These pay a small monthly income when you become disabled. They also cover your credit card bill or the minimum payment in the event of your death, disability, or other misfortunes like loss of job. These are expensive, relative to buying a more comprehensive life insurance.
Also, avoid the daily hospitalization insurance pay a certain amount (such as $100) per day you spend on a hospital. Get the more comprehensive health insurance policy instead.
Buy only insurance that do not require medical evaluation only if you are in poor health. These insurance tend to be more expensive.
Dental insurance is good – if it comes from your employer. Otherwise, it is expensive as they generally cover teeth cleanings twice a year and limit payments for more expensive work.
Instead of home warranty plans, your money is used more wisely in hiring a competent inspector to uncover problems before you buy your home.
Extended warranty and repair plans are also not necessary, and are also expensive relative to what they cover. Paying for repair after the manufacturer’s warranty has expired does not bring about financial catastrophe.
The same thing is true for insuring packages in the mail, contact lens insurance, and other insurance that cover situations that are not likely to bankrupt you.