Thoughts on Insurance

Insurance is an essential Financial Planning tool. The purpose of insurance is to transfer risk. Especially for those at a younger age just starting out adulthood; you don't have a large cash amount and certain losses could bankrupt you, so wisdom says to transfer the risk.

These are 6 Basic Types of Insurance

Homeowners or Rental Insurance
Auto Insurance
Health Insurance
Life Insurance
Disability Insurance
Long Term Care Insurance

The ones that I am going to highlight today are the first four: Homeowners/Rental, Auto, Health, and Life Insurance.

Homeowners/Renters Insurance

When you own your home, it is a must to have homeowners insurance. If you are renting, you NEED rental insurance. It is extremely cheap (usually about $10/month) and if you do not have it you are no longer covered under your parents insurance.

Auto Insurance

I recommend that once you have your emergency fund, you should raise your deductible. The reason for this is because you will save a lot on your reduced monthly payment. Be smart with that and save it up so that it becomes your "Car Emergency Money" that will pay for the deductible when you have to pay it. Make sure you carry adequate liability.

Health Insurance

Along with auto insurance, I have the same recommendation for health insurance to raise your deductible because when you have an emergency fund in place you can save money on your monthly payment. And after a certain period of time you end up saving the whole amount of the deductible from the monthly savings anyway. If you are self-employed you can save money using an MSA (or Medical Savings Account). I will post on tax tips in the future and more will be included on the MSA then. But for now, the MSA is a tax deductible medical savings account for medical bills that works with a large deductible.

Life Insurance

This is a must if you are married and have a house. If you were to die without life insurance and the two of you have a mortgage together your spouse would be responsible for the amount. Chances are she was depending on your income for this which is why you are protecting her by taking out life insurance. However, if you both are working and have no debt (no mortgage, loans, cards, etc.), she really isn't depending on your income. In this situation it is not vital to have life insurance.

Life Insurance is to replace lost income due to death. It is actually more like "death insurance." There are 2 types of Life Insurance: Term and Cash Value.

Term insurance is for a specified period, is substantially cheaper, and has no savings plan built in. Cash Value insurance is normally for life and is more expensive in order to fund a savings plan.

A common misconception about life insurance that it is permanent need. That you will ALWAYS need life insurance.

What I recommend is for you to get a 20 or 30 year term life insurance and invest the monthly savings into a diversified portfolio of mutual funds (ex. 25% growth, 25% growth & income, 25% aggresive growth, and 25% International).

I encourage you to price a plan for Cash Value and Term and the difference will most likely be a great deal. Usually a plan for Cash Value that is $100 will be for about $10 or $15 with Term. If you save and invest the other $90 per month for the entire term of 30 years you will have $314,546.77 at the end of it. You will be self insured and no longer need to be sinking payments into a life insurance savings plan.