When and When Not to Get Insurance

Flood insurance. Though there's a low probability you'll need this coverage — unless you live in a floodplain or low-lying area or on the waterfront — the potentially severe damage makes it a good idea. And because of pooled risk, the price is relatively low compared with the consequences of a flood. You should understand what is covered and what isn't (for example, whether a sewage back-up is covered depends on the cause of the problem).

Private mortgage insurance (PMI).

Lenders typically require this on mortgage loans when down payments are less than 20 percent of the sale price, so paying this amount down is the best way to avoid this expense. But after you've paid a substantial portion of the loan, there's no justification for the lender's continuing to require PMI because the accumulated equity protects them if you fall behind in payments. Many lenders will eventually drop the requirement for PMI, but this often takes a lot of campaigning by borrowers.

Long-term care insurance.

These policies tend to be pricey — often $2,000 to $4,000 per year — so consumers should carefully weigh the benefits against the cost. And even at this price most policies don't begin to cover this type of care until after three months. If you die or are well enough to go home by this point, these policies pay out nothing. Yet this coverage can be a good idea for many people, depending on their financial situation.

Disability insurance.

This covers the risk that you won't be able to earn a living because of health reasons. This coverage tends to be more expensive than it should be because some people buy it planning to later claim they're disabled. Again, you may or may not want to insure against this risk. One way to save money on insurance is to make a conscious effort to manage risk, which most people do already. You manage your risk of causing a car accident by driving cautiously and the risk of your television going haywire by selecting a well-reviewed model. Though you have health insurance, you may manage your risk of cardiovascular disease through diet and exercise.

When you do decide to buy insurance, compare vendor rates and terms and read policies carefully before buying. And be sure to buy from a reputable vendor.

Ted Schwartz, a Certified Financial Planner®, is president and chief investment officer of Capstone Investment Financial Group http://capstoneinvest.net. He advises individual investors and endowments, and serves as the advisor to CIFG UMA accounts. Because Schwartz has a background in psychology and counseling, he brings insights into personal motivation when advising clients on achieving their wealth management goals. Schwartz holds a B.A. from Duke University and an M.A. from Oregon State University. He can be reached at ted@capstoneinvest.com.

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