Insurance. One of those things that you don’t want to think about, but when you need it, you’re glad you have it. Do you have the right kinds of insurance? Are you spending money on insurance that isn’t necessary? That’s what Dave Ramsey covers in lesson 6 of Financial Peace University, called “The Role of Insurance”.
The purpose of insurance is to transfer the risk from you to the insurance company. It helps to protect what you have, and any money you’ve accumulated. Without going into too much detail, I’ll quickly cover the types of insurance you need and the types of insurance you don’t, as taught in this lesson.
Insurance you need:
- Car Insurance – In most states I think it’s illegal if you don’t have it, but you want to make sure that you’ve got an adequate amount. There are companies that sell the minimum legal amount, but if you’re in a bad accident, they will only pay out until the maximum is reached. If it ends up costing more than that, you’re on the hook and it could force you into bankruptcy.
- Homeowner’s Insurance – Make sure you have enough to cover the rebuilding of your house. Personally, I know that the amount they cover you for seems crazy since it’s a lot more than you could sell your house for. But they aren’t giving you money to buy the house all over again, but to rebuild what you had, and that can be expensive.
- Renter’s Insurance – Renter’s insurance is cheap and if something happens to your stuff while you live in an apartment or rental, you’re responsible for insuring it.
- Umbrella Insurance – This is helpful if you start to build wealth and look like a target for crazy people.
- Health Insurance – This one is kind of a no brainer. With the laws changing, you’ll have to get it. A Health Savings Account might be a good option for saving money, but it may not be for everyone. I’ll try to write another post about HSAs at a later time.
- Long Term Disability Insurance – If something were to happen to you and you became permanently disabled, you’ll want some income to pay the bills. This one takes care of should that horrible thing ever happen.
- Long Term Care Insurance – Dave says if you’re over 60, you need to purchase one of these plans. If you or your spouse needs long-term care, it could wipe out your nest egg.
- Identity Theft Protection – This is probably the newest recommendation from Dave. He suggests you get a policy where they will assign someone to clean up the mess should your identity be stolen.
- Term Life Insurance – You need to get a term that will cover you getting out of debt and paying off the house. It should be 8-10 times your income.
Insurance you don’t need:
- Whole Life Insurance – It’s incredibly overpriced and you would be better buying term and investing the difference or using it pay down your debt snowball.
- Credit Life and Disability
- Cancer and Hospital Indemnity – Your health insurance should take care of this.
- Accidental Death – Remember term life insurance?
- Pre-paid Burial Policies – You would be better off setting aside the money and investing it.
- Mortgage Life Insurance – So, they will pay off your mortgage if you die, but as you pay down your mortgage, the amount of coverage your paying for is decreasing. You’d be better off buying extra term insurance until the house is paid for.
That pretty much covers them all, but not in nearly as much detail as when you attend the class. Dave goes into much more detail about the levels of coverage you should get and other things to look for and avoid. Next week’s lesson is about retirement and college planning!!!
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