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Insurance Strategy

It’s funny how much insurance you can buy if you try. You can insure your car, home and life – as well as your cell phone, appliances, kid and even your dog.

Insurance companies make a profit. And if they make a profit, it is almost certainly at the expense of policy holders. I’m not trying to say insurance is evil. It is quite helpful and necessary. It is important though to buy the right insurance for the right reasons.

Some consider insurance as an investment – It is not an investment. Insurance is a way to transfer your risk to the insurance company for a price. That means you are willing to pay the insurance company the average cost of some risk, plus a profit to prevent you from having to assume the risk yourself. Based on that, there is a strategy for what to buy, and what to skip.

Buy insurance for the big things and skip insurance for the little things. If something is big enough that you can’t cover it yourself, you need to transfer that risk to the insurance company. If the risk is something you can cover, don’t insure it. As you build savings you may be able to cut back on some insurance. Here are some thoughts on how this approach applies to some common kinds of insurance.

Life Insurance is designed to replace your income when you die. More specifically, it is designed to support those that depend on your income. If you don’t have anybody that depends on your income, you don’t really need life insurance. The strategy for life insurance is to buy a Term life insurance policy to support your family should you die. Once your kids are grown and you’ve put away enough to retire – you can drop the life insurance.

Auto Insurance. If you need a car to get to work and you don’t have enough cash to replace the car, you need to carry collision and comprehensive insurance. If you do, the insurance company will pay to fix your car. If you have an emergency fund, you should consider raising your deductible to save some on a premium. If your car is only worth $5,000 and you have $20,000 in your emergency fund; you can afford to drop that insurance completely and take the risk yourself. If you are a safe driver, you will likely save money by doing so. You can also cover towing, car rental and all those extras yourself, so consider dropping them as well. However, you would probably have a tough time paying $100k for someone’s medical bills if you were at fault for a wreck. That’s a big thing. We buy liability insurance for that. Make sure you have at least $100k/person $250k/occurrence in medical liability insurance and $100k property damage. Double those amounts in liability are not a bad idea.

Medical bills can be enormous. You need health insurance that has no upper maximum. You can save money on it by having a high deductible.

Long Term Disability If you cannot work due to becoming disabled, disability insurance will pay a significant percentage of your salary. Losing your ability to work is a big thing. If your employer does not provide Long Term Disability insurance, you need to buy some.

Most other insurance is for little stuff, or a duplicate of something else.

· Accidental death is not a helpful insurance. If you have life insurance, you don’t need more money paid because your death was an accident.

· Cancer insurance is not necessary. If you have health insurance, it will pay your cancer related medical bills the same as any other illness.

· Insurance on your cell phone, appliances, tires and pets are all policies you should probably skip. Yes, it is possible that the day after you cancel the cell phone protection plan that you will drop and break it. On average –people will come out ahead if they cover the little things with savings and reserve insurance for the big things. If that were not true insurance companies would not be making a profit.

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