Do you have end of civilization coverage?
Estimated time: 2 hours
Materials: insurance records
Project difficulty: medium to difficult

If you are following along with my introductory 10-part money primer, you just finished calculating your emergency fund. Something to consider when calculating your emergency fund are your insurance deductibles. Now that you have your insurance documents out, why not go over them to see if you still have the right types and amounts of coverage?

In my mind, insurance is like a collective emergency fund – you are paying into a pool of money and if you have a qualifying event you get to pull money from that pool. However, if you don’t have a qualifying event while covered by insurance you will never see your premiums again. Therefore you want the lowest premiums you can find for the coverage that you need. And remember, if you set your deductibles higher, premiums go down. Let’s go over the basic types of insurance and what you can do to make sure you are covered while not paying too much. To warn you ahead of time, this list is long and potentially boring, but you do not want the kind of “interesting” that happens when you need insurance coverage that you don’t have already.  Also, most of this is probably USA specific, sorry.

Auto insurance – if you drive a car in the USA you are legally required to have a certain level of insurance (this varies by state). The required coverage is “liability,” in other words, damage you cause to someone else’s car, their injuries and passenger’s injuries. You may want to carry liability coverage higher than the state minimum. Assuming you are at fault and the costs from the accident exceed your insured amount, you will be responsible to pay them from your own assets. If you have a small net worth, the other person might decide it isn’t worth the trouble to sue you – however, morally and legally you are responsible for the total cost of the accident. Optionally, you can add insurance for your own vehicle and medical costs, either if you are at fault or if the other driver is uninsured. If you do not have this optional component, you should carry the replacement cost for a vehicle in your emergency fund and have adequate health insurance. This is easier to do if you have an older car, and the savings in premiums can really add up. Also, the higher the deductible the lower the premium (and remember to consider the deductible in calculating your emergency fund).

Health insurance – in the USA this is usually attached to your job and hopefully subsidized by your employer. Watch this one like a hawk – according to a Harvard study 2/3 of all personal bankruptcy’s happened due to medical costs, and of that group 78% had insurance! It is vital to your financial health that you understand exactly what your policy covers and determine if you need to get any additional coverage. The options and rules are so complex and policy-specific that I recommend reading the insurance documents closely and then meeting with your human resource department or insurance agent to go over any questions. Do not wait to get sick before closely reviewing your policy.

Long-term disability – if for any reason you are not able to work due to an accident or health problem, this insurance will replace a certain percentage of your income (like 60%). Some jobs include this coverage automatically if you are lucky. This is important insurance even if you are young and healthy. In the unlikely event that you are incapacitated you don’t want to rely on social security disability alone. Remember that insurance in general is about protecting against catastrophic financial events that are largely out of our control. This insurance falls into that category for me.

Life Insurance – if anyone else is relying on your salary/income (spouses, children etc), you need to get some life insurance unless you are already rich. The payout needs to be enough to generate the lost income through passive investments. For instance, say that your take home pay is $50,000 and you think your spouse could find an investment (like stocks/bonds or even CD’s) that returns 5% annually on average. You would need a total of $1,000,000 ($50,000/.05). There are lots of other considerations, such as replacement costs for a stay-at-home spouse, inflation, and also using your spending vs. take home pay. But having something slightly imperfect now is more important than calculating the perfect number later, when it could be too late. The vast majority of people need term life insurance. This means that the coverage only lasts for a certain amount of time like 15 or 30 years. At the end of that term, you should have enough in retirement assets to replace your income anyway (right??). Whole life and other types of insurance are complicated, much more expensive, and usually a rip-off. It might be useful in certain limited circumstances, but for right now, focus on getting the best term-life coverage if you don’t already have it.

Home insurance – chances are that you have this already since all mortgage companies require it. Basically if your house catches fire or a natural disaster occurs, this insurance will pay to replace your house and its contents. Additionally, it usually caries liability coverage for personal injury on your property (like someone slipping on your stairs). Some particular coverage such as flood and earthquake coverage may be available with optional rider policies. Check to see what is included and excluded and call your insurance company if you have any questions. Is the amount to replace your possessions high enough? Think about the cost of your clothes, tv, computers, furniture, jewelry, etc. By the way, having photographs and serial numbers of everything stored in a remote location sure does help to process your claim in the event that something happens.

Renters insurance – if you don’t own your home, think very carefully about getting this insurance. It is usually much cheaper than home insurance because it doesn’t have to cover the house or building that you are renting. Instead it just covers your possessions like clothes, tv, computers, furniture, jewelry, and so on. Pictures and serial numbers stored off-site are handy, exactly like home insurance.

Umbrella insurance – let’s say your auto and homeowners insurance covers up to $300,000 in damages. What happens if you have $400,000 in damages? It’s easy to imagine with hospital costs as high as they are. If you have umbrella insurance, it usually kicks in from $300,001 up to $5 million (or whatever total amount you choose). Usually you get this from the same company where you have your auto and/or homeowners insurance. If you don’t have umbrella insurance, the harmed parties (the people you ran into, etc) can sue you for damages that exceed your insurance coverage. If you don’t have significant assets or income, they probably won’t sue you, since they would just be wasting money on legal fees for nothing. However, if you do have investments, a nice car, other assets, or a good paying job they might go after you for the difference. This is why you want to buy umbrella insurance. It also can cover a few additional things like slander, libel, and even false arrest.

As you go through these, think about writing up a one-page summary of what you have and the amounts of your deductibles and premiums. Take care of any questions or issues with your coverage immediately! Remember that a few hours now could prevent catastrophic financial problems in the future - this is within your control, whereas situations where you will call upon your insurance are largely not in your control.  Once you are satisfied with your coverage and understanding of it, you should give yourself a pat on the back and hopefully sleep a little easier. Revisiting this one-pager when jobs change and on an annual basis is highly recommended.