When you think of financial planning, you probably think of paying off debt and saving for the future—but what about insurance coverage?
Both under-insurance and over-insurance can be bad for your financial health—and many Americans miss the target. For instance, the Insurance Information Institute reports that 35 percent of American homeowners have too little insurance on their homes, while 17 percent have too much.
Having just enough insurance means that you and your assets will be protected in case of loss, but you're not paying excessive premiums for coverage you don't need.
How much do I really need?
Consult a trusted financial advisor to help you make big decisions, but here are tips on a few major categories of insurance:
If it exists in your state, get guaranteed replacement-cost coverage on your home. Some insurance covers only the policy's face value—not what it would actually cost to rebuild if you lost everything.
Experts recommend checking yearly with a local real estate appraiser and/or construction company to determine a current replacement cost. Builders can give you a per-square-foot charge; just multiply it by the size of your home. Remember, you don't need to insure your land (which was probably included in the purchase price you paid)—just the home and its contents. Then update your coverage accordingly.
Another smart move: an inflation guard clause , which adjusts your policy automatically upon renewal, to account for rising or falling building costs in your area.
If you rent, always carry renter's insurance. Do a survey of your belongings and add up their replacement value, not current value, to determine your level of coverage. Keep photos or video records along with your lists.
Keep tabs on what your car is worth through services like the Kelley Blue Book ( www.kbb.com). If it's worth less than $4,000, consider dropping collision and comprehensive coverage, which over time can cost you more than you'd ever collect. Getting uninsured motorist coverage makes more financial sense.
New cars depreciate rapidly. If you purchased one with a small (or no) down payment, you might owe more on your loan than the car is worth. That leaves you vulnerable if the car is totaled. Check its value. If the difference is several thousand dollars, consider gap insurance, at least for the first year or two until the “gap” diminishes.
Sit down with a planner or a worksheet to come up with a realistic number. Your life insurance needs depend on many variables—dependents' needs, a spouse's income and so on. Don't let an insurance agent tell you how much coverage to get.
Also, do your homework before purchasing a whole life or cash value policy (as opposed to term life insurance). Some agents push whole life policies because they earn higher commissions, but they cost you more to cancel. With term life, you can adjust your policy as life circumstances change.
Ideally, disability insurance will cover you till you're 65 and replace at least 60 percent of your income. You might be able to lower premiums by accepting a waiting period of a few months, if savings could tide you over in the meantime.
Insurance you don't need
Forego policies called involuntary unemployment, accidental death and mortgage insurance in favor of plain old life insurance and an emergency fund. And avoid credit card loss-prevention insurance—your losses from credit card theft are limited to $50 per card, so it's rarely worth it.
No matter what kind of insurance you're shopping for, buy smarter by doing the following:
* Shop around. Get multiple quotes for the same coverage to find the best deal.
* Purchase from reputable companies. The insurer has to be around to pay your claims!
* Choose a higher deductible if possible. Low deductibles are pricey. Insurance is really for large, unaffordable losses.
* Take advantage of all discounts —for example, for auto safety features, good driving record, anti-theft devices and so on.
* Eliminate any duplicate coverage, and see if getting multiple policies through one provider would save you money.
Written and researched by Senior Writer Lisa Hughes, NRECA's Benefits Department
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