Importance of insurance: Sixth in a series of financial tools to master

 

Getting insurance is part of being financially secure!

Welcome back!  This is a sixth installment in the series of financial tools to master.  In the previous installments, we covered checking accounts, savings accounts, budgeting, retirement accounts, and brokerage accounts.  I’ll put links to all of these posts at the bottom of the page for those who have missed any of them.

Insurance, as weird as it sounds, is one of the most important tools to master for financial well-being.  Without it, all the money you have will no longer be with you.  If you have a medical emergency or a car accident, insurance is what you need so you won’t have to pay out of your retirement accounts, brokerage accounts, or your emergency fund.

It’s not one of the more sexier topics for financial independence but I believe it warrants a closer look as it does require everyone to deal with and to understand it.  

Let’s first define the term:

Insurance is a means of protection from financial loss.  It’s a form of risk management to hedge against potential loss.  

Three insurance types we’ll be covering are health insurance, home insurance and car insurance.  

• Health Insurance:  

This is perhaps the most important out of the three as the cost of a lengthy hospitalization and/or surgery these days is simply incredible.  If you didn’t have health insurance, you would blow through your net worth in a hurry. 

In fact, about 66% of people who went bankrupt did it due to medical bills.  This is a staggering statistic.  Don’t end up in this statistic yourself.  Get proper health insurance!

There were times when I was younger when I didn’t have health insurance, but this is not a good idea.  What little net worth I had, it would’ve wiped me out if I had gotten sick during those times, or worse, it would’ve put me in debt.  I was feeling scared not having insurance!  Not recommended!

Majority of us who are working will most likely get health insurance through the employer.  Those who are early retirees like myself and FIRE (financial independence retire early) movement crowd, or anyone working part time / gig worker, will require getting their own health insurance.  

The most popular place to get health insurance is through the Affordable Care Act ‘Marketplace’ (healthcare.gov).  

This is the official website run by the government.  It provides a subsidy depending on your yearly household income.  You would sign up by providing your personal information including: date of birth, social security number, home address, etc.

Once you get to the website, click ‘See if I can enroll’.

Enter your zip code then select one of the options that apply to you, then click ‘Continue’.

Depending on the zip code you enter, you’ll either be routed to state’s own marketplace or finish up from ‘healthcare.gov’ website.   Either way, it’ll walk you through confirming your identity then it’ll ask personal information before selecting the insurance as your final step.

The cheapest insurance you can buy is typically the ones that have a high deductible.  *If the plan has a $7000 deductible, then you’ll need to pay that amount yourself before your insurance company pays. Having these high deductible insurance will still be so much cheaper than you paying for the hospital bill yourself!

One thing I’d like to add to this from my experience is this:

The zip code you enter has lot to do with the cost and deductible of healthcare plans.  Some states are going to be cheaper than others.  For example, when I priced out insurance based on my brother in law’s address, it came out to be about $700 per month.  He lives in Long Island, NY.  

When I priced out a zip code in Pennsylvania, it was $270 per month.  Prices will vary...

Tip:  I personally do not recommend buying temporary insurance.  The premiums may be lower but the coverage leaves much to be desired...Unlike Affordable Care Act insurance, there aren’t any allowances for normal checkups.  Please do your research if you’re considering this type of insurance!

• Home Insurance / Renter’s Insurance 

Most of us will end up buying or renting a home.  In either case, consider getting insurance.  If you’re taking out a mortgage, then your mortgage company will require you to have home insurance.  If you’re renting, some apartment complexes will require renter’s insurance as well.  

If getting a renter’s insurance, I recommend going through a licensed agent to help you find the best price and coverage.  Google ‘licensed insurance agent near me’ to get a list of agents near you.  What agents can do is compare quotes from different insurance companies to get a good price.  I’ve been using one since about 1996 and I’m satisfied with their service.  The best part of using an agent is, it saves me the time and effort to get quotes from EACH company separately.  The agent can do this on my behalf!

You can also Google ‘renters insurance near me’ to search online if you prefer.  Either way, you should be able to find something for about $10 per month.

For home insurance, I would recommend the same method of using a local licensed insurance agent.  Or, you can search online for search term ‘home insurance near me’.  For home insurance, the agent should know exactly how much insurance to get.  You’ll need to know the value of your home to get a correct quote as well as other information including: age of various components (air conditioning, heating, roof, water heater, appliances, etc.), age of home, septic tank or public sewer, garage or no garage, etc.

I recommend working with your agent or do it yourself to compare rates after a year or two.  The rates you originally get will creep up as each year goes by...It’s always a good idea to see if rates can get cheaper with other insurance companies.  Shop around!

• Car Insurance:

Most of us living in the US will require getting car insurance.  Just like with home insurance, either you’ll be required to have full insurance (financed or leased vehicle), or liability insurance (car’s value is less than what you would pay for full insurance).

Liability insurance is the minimum insurance required by each state to pay out in the event YOU hit someone or something.  Each state’s liability requirements are different.  Check with your local insurance agent for more info.

Comprehensive or full coverage insurance is liability plus insuring your car from damage or loss whether you caused it or not.  It covers your vehicle in the event it gets damaged from non-collision, e.g., you hit a mailbox and it caused damage to your car and the mailbox.  Your car will be fixed by comprehensive insurance while the mailbox will be covered by liability insurance.  Comprehensive insurance will typically be more costly than a liability insurance in most cases.

As with other insurance above, I recommend using an agent to do the price shopping.

When we moved to North Carolina in August, we made sure to hire an agent to shop for our car insurance.  That agent came through for us with a great rate!  I had gotten a quote from Geico, but the agent handily beat that by about $300 per year.

If you’re getting a comprehensive insurance (full coverage), the amount of insurance you’ll need will vary depending on whether the car is leased or financed.  Typically for leased vehicles, the minimum will be:  $100,000/$300,000 liability, $50,000 property damage and up to $1000 maximum deductible.  For financed vehicles, each bank will be different so it’s best to check with your lender.  

In conclusion:

• Insurance is a requirement whenever you’re financing or leasing a home or car.  Even when it isn’t a requirement, you should still get insurance to hedge against any possible loss.

• Health insurance, with the introduction of Affordable Care Act, should be required if you currently don’t have insurance, so you don’t get wiped out due to a health emergency.  In many cases, the premiums are subsidized by the government and you’ll pay reduced premiums.

• Having insurance is one of the most important things to have for financial well-being.  Without one, it’s easy to end up in debt and/or wipe out your net worth!

Thank you all for reading!  

Jake

Wandering Money Pig 

If you missed the post ‘Importance of a checking account...’, please click here.

If you missed the post ‘Importance of a savings account...’, please click here.

If you missed the post ‘Importance of a budget...’, please click here.

If you missed the post ‘Importance of a retirement account...’, please click here.

If you missed the post ‘Importance of a brokerage account...’, please click here.

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