Mellody's Math: Over- or Under-Insured?
NEW YORK, March 21, 2002 — -- Like many Americans, you may be giving serious thought to your insurance needs following Sept. 11.
About 1.4 million life insurance applications were filed in October — up 9 percent from the same period in 2000.
As people's interest in insurance grows, so should their knowledge of what is appropriate coverage. Although it all depends on where you are in your life and what your responsibilities are, there are certain universal ground rules that you should consider before you purchase insurance.
Must-Have Insurance
Life Insurance — To Insure or Not: Most experts recommend that a person carry insurance coverage of five to 10 times their annual gross salary. The primary reason to own insurance is to ensure that when you die your debts will be covered and your dependents will have the financial resources need to run the household without you. So if you are single, without dependents, and have little outstanding debt, consider taking a pass on life insurance.
Term vs. Permanent — Which One Is Right for You?: Those with dependents face a choice between term and permanent insurance. Think of term and permanent insurance as you would the difference between renting and buying a home.
With term insurance, similar to a renter, you pay for something that ultimately is not your own. Likewise, permanent insurance is similar to taking on a mortgage of a home, which will ultimately be yours. After you complete the final premium prepayment, the permanent policy, with its "cash value," is yours.
Term insurance can be seen as a cushion for what you have not been able to accumulate. For those with expenses like tuition or a mortgage, term insurance is the way to go. However, for expenses that extend beyond the immediate, permanent insurance is a means to provide additional financial security for your dependents.
Health Insurance: The main precursor to sound financial health is good physical health. According to the National Foundation for Credit Counseling, medical bills are the fourth biggest reason people go into serious debt. And with an estimated 42 million Americans without health insurance, this is a cause for serious concern.
If you are recently unemployed and without insurance, it is paramount that you maintain health coverage. The most popular means to keep your health coverage is through the Consolidated Omnibus Budget Reconciliation Act of 1986, more commonly known as COBRA, which allows you to maintain your current insurance coverage for 18 months after your job ends. COBRA costs an average of $410 per month for a single person's coverage and more if partners or children are included.
Homeowners and Renters Insurance: Think of home and renters insurance as more than just coverage for a home disaster. If you live in a condominium or rent an apartment, your landlord's or condo association's insurance should cover damages to the building — meaning the structure itself. But such a policy only covers their building and not your belongings. Therefore, renter's insurance falls into the "must have" category.
In addition, with both homeowner's and renter's insurance you are covered for liabilities that could potentially arise — like someone falling on your front step or a party-goer at your apartment breaking something besides your china. Renter's insurance is relatively inexpensive — for as low as $150 to $300 a year you can get sufficient liability and property coverage.
Auto Insurance: This is the one form of insurance that is mandatory for car owners. Although you need auto insurance, you do not need to pay an arm and a leg for it. Outside of getting married, being older or living in a good zip code, there are relatively easy things you can do to save money on auto coverage.
When shopping for auto insurance it is very important to do your research: A study by Progressive Auto Insurance found that the average spread between highest and lowest six-month rates for the same coverage was $515. Go online, scour the Yellow Pages, ask around — do whatever you can to find the most reasonable rates. In addition, consider adding features to your car to decrease the liability, like the installation of a car alarm or added safety features like air bags and anti-lock brakes.
Death and Disability Insurance: For almost everyone, disability insurance should be viewed as a necessary expenditure. According to the Department of Housing and Urban Development, half of all mortgage foreclosures are the result of a disabling injury or illness.
That said, the Health Insurance Association of America says that 60 percent of working adults in the United States do not have disability insurance. Your employer, however, most likely offers disability insurance — in fact, you may already be covered without knowing it. If you do have coverage through your employer, it is important to read the fine print to determine what is covered and whether or not you need to look into purchasing additional coverage. Typically, disability insurance covers 60 percent of your income.
Similar to a deductible in life and auto insurance, disability insurance carries an elimination period. The elimination period determines when you start receiving benefits. Elimination periods are divided between 60, 90, and 120 days. You can save money by choosing a longer elimination period and assuming more risk. This should be an option only if you can afford to live without the disability payments.
Unnecessary Insurance
Travel Insurance: Since Sept. 11, the worst-case scenario is on the mind of many travelers. Travel insurance companies reported a 30 percent increase in sales volume since the attacks. However, travel insurance is often redundant to the coverage you may already have.
For example, many car rental providers offer collision damage waiver insurance to cover you on any damages to the vehicle. However, if your auto insurance policy includes comprehensive and collision coverage, you need not purchase the additional coverage. In addition, some credit card companies will pay for damages to a rental car in the event of an accident — double check with yours to see if your card provides this protection.
Similarly, flight insurance and lost baggage protection may be redundant as well. Most people's life, health and home insurance already cover many travel-related mishaps. Just because you are not home, does not mean that your coverage ends.
Mellody Hobson, president of Ariel Capital Management in Chicago, is GoodMorning America's personal finance expert. Click here to visit her Web site, ArielMutual Funds.com. Ariel associates Matthew Yale and Anne Roche contributedto this report.