10 April 2011
How Much Insurance Is Not Enough? The Rules of Thumb Never Lie

A lot of us fly pretty blind when it comes to insurance – either buying too much, or leaving ourselves exposed with scant coverage. Worse yet is that nagging, middle-of-the-night feeling that we’re just not sure if we really are adequately protecting ourselves and our loved ones.  But how much auto, homeowner’s, life and disability insurance do you really need?

Fortunately, if you follow some general rules of thumb – and make allowances for your particular situation and needs – you should be fine.

General rule of thumb: Insurance isn’t meant to cover the normal expenses of daily living. It’s designed to bail you out when you face catastrophic expenses that might otherwise wipe you out financially.

Action: With this in mind, consider high limits on your policiesbut high deductibles, too.

Auto insurance rule of thumb: Consider dropping coverage that you do not need or coverage that can otherwise be provided. For example, eliminating comprehensive collision coverage may make sense once the value of your vehicle drops below $3,500 or so. You can bank the savings for repairs or to purchase another car down the road.

Likewise, there may be no need to pay for medical payment coverage if you have solid health insurance.

Action: Focus on liability coverage, which is the most important component of auto insurance (and the one to which people pay the least amount of attention). It pays for damage to property and physical injury from an accident that is your fault.

Homeowner’s insurance rule of thumb: For property damage, the minimum amount of coverage you need is what it would cost to rebuild your home if it were destroyed. On the liability side, coverage should be at least equal to your total household assets. For example, if you have $300,000 in savings and $200,000 equity in your home, carry at least $500,000 in liability coverage.

Action: For an accurate idea of how much damage coverage you need, ask your insurance agent for a “true replacement cost estimate.”

Renter’s insurance rule of thumb: The rule of thumb here is that if you rent (more than one in three of us do now), renters insurance is a necessity. Why? Because, in general, landlords are not responsible if your belongings are stolen, damaged or destroyed in a fire. You’ll typically pay around $15/month or $150-$250/annually for renter’s insurance.

Action: Make sure your policy includes relocation assistance as well as “replacement value coverage,” which will help avoid protracted battles over the price of depreciating assets like old TVs and video equipment.

 Life insurance rule of thumb: You’ll probably need enough life insurance to cover from six to 10 times your annual earnings. Why such a range? Well, if you’re the sole breadwinner in a young family with kids, you may need coverage worth 10 times your salary or more. If you have no kids, no mortgage and a working spouse, you may not need life insurance at all. Other considerations: If both spouses work, both should have life insurance to replace their own income. Also, avoid buying more than one policy for any person. Each policy comes with fees built into it. Two $50,000 policies would cost more than one $100,000 policy.

Action: If employer-provided insurance is inadequate, get additional coverage. Many times you can get additional coverage at the group rate, often cheaper than buying it on your own.

 Long-term disability rule of thumb: Buy enough either privately or combined with an employer’s policy to replace 60 percent of your income. The policy should pay benefits for five years – or better yet, up to full retirement age, when you will be eligible for Social Security.

Action: Select a policy that pays full benefits if you’re unable to work in your chosen profession.

Don’t Set It and Forget It

Following some general rules of thumb can help ensure proper coverage But, just as you periodically review your investments and retirement accounts, you’ll also need to review your insurance needs and make adjustments to reflect changes in your life. A qualified insurance agent can help.

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