Do You Really Need Insurance?

Recently my wife turned 26 which you wouldn’t think is a special birthday.  However, it is the birthday which you are no longer allowed to be on your parent’s insurance.  So naturally we started to discuss health insurance options.  This is considered a qualifying event so she will be able to purchase insurance.

Health insurance

In the past, you could take a gamble and go without health insurance.  Today you still can but you will have to pay a penalty to the government.  The penalty to go without coverage is the greater of $695 per adult or 2.5% of your household income.  There is an exemption to the penalty if you did not have coverage for up to two months.  You can see it is kind of costly to go without insurance, but still cheaper than an unsubsidized $150 a month minimum coverage plan.

In our situation, my wife will only need coverage for four months until I turn 26 and can get a family policy through my employer.  Even if we were eligible for an exemption to the penalty I would still purchase insurance because health issues can pop up unexpectedly and can be a huge financial burden with and especially without insurance.  Three years ago I broke a finger and needed surgery, instead of paying $7,000 for all visits and surgery my total was closer to $1,000.  That was just a finger, imagine the cost for a vital organ.

To reduce the cost of your insurance, choose something with a high deductible.  Even though you will have to spend more up front on medical expense you will pay less if you don’t need frequent medical attention.  Your care can also be paid with a flexible spending account.

Car insurance

As I am risk-averse and want to protect myself from financial trouble, car insurance is a no brainer.  I am doing a little bit of gamble by paying per mile for my insurance, but being in Taiwan means no miles added to the car and therefore a low premium.  In California and a majority of states, it is required to carry car insurance.  Here the minimum is $15k/$30k/$5k which is the max the insurer will pay for injury to one person/multiple people/property.  I carry more than ten times those limits because it wasn’t too much more expensive and stuff these days is so expensive to fix, I don’t want to worry about it.

Life insurance

I consider life insurance as more of a choice which depends on your situation.  If no one is depending on you then your death will probably not be a financial burden.  If you have a spouse who stays at home and they would like to continue to do so if you died then you would need life insurance.

It is said you can retire on 25 times your annual expenses, so to be safe you could take out life insurance that covers up to that amount.  For instance, if your family spends $40,000 a year, a $1 million policy would be great.  However, since we are all saving up for retirement, we will likely gain assets and the $1 million policy will be a bit too much years down the road.  In order to pay less in premiums, you could buy several policies.  Say your net worth is $0, in ten years will be $150,000, in twenty will be $500,000, and in thirty $1,000,000.  You need $1 million in current coverage, but in ten years you only need $850,000.  To pay less in premiums you could buy a 30-year policy for $500,000 in coverage, a 20-year policy for $350,000, and a 10-year policy for $150,000.  Shorter policies are less expensive so you will save money while still getting to $1 million if you die assuming you are on track saving your money.

Disability insurance

This insurance protects you in case you can not work and therefore will be unable to earn income.  Maybe you are blinded by the sun or sustain a head injury, you will still need money for your routine expenses even though you may not need continuous medical care.  The state will offer some money, but you will likely want to have more than that.

Homeowners’ and Renters’ insurance

Protects you from damage to your property from things like fire or theft.  You can add extra coverage such as protection for valuable jewelry or coverage against someone getting injured on your property.  If you have a mortgage this will be something that is required by the bank.  Like all types of insurance, shop around.

Umbrella insurance

This insurance covers above your limits on other policies if they become exhausted.  For instance, if your car causes $500,000 in property damage while you only have $100,000 policy limit, then the umbrella would cover the extra.  These policies generally require that your other policies, like home and auto, are under the same provider as the umbrella.  I don’t think this policy is necessary unless you have a lot to lose or think you are likely the target of lawsuits.

Conclusion

Your employer likely covers some of these things so it is worth reading your employee handbook.  I like to play it safe and insure against things that will wipe out a lot of savings.  However, I manage to keep the policies more affordable by having a high deductible.  Insure against big things and let your savings cover the small stuff.  Make sure to care for your health because it won’t matter how much money you have if you have poor health.  Stay healthy and keep saving!