Insurance – what do you really need? By Christina Mae Olson, CFP®
Here is the definition of insurance that I like the best: TO GUARANTEE OR PROTECT AGAINST LOSS. We all assume some risk in our lives. Risk can be evaluated on a continuum. Very little risk is involved by just getting out of bed in the morning. Some risk is involved with getting in and out of the shower. More risk is involved with eating leftovers from dinner three nights ago. We risk quite a bit driving or riding in a car. Even more risk is involved with smoking cigarettes.
Potential loss is associated with risk. Insurance is meant for those huge, catastrophic losses that you can’t easily recover from. You wouldn’t buy an insurance policy to protect you from “waking up injuries” unless your life was threatened by the very act of waking up each morning. Your health insurance doesn’t cover hang nails since you really don’t risk loosing much with these.
If you can recover easily from a certain loss then you probably don’t need insurance to cover the potential loss. For example, if you drive a 1995 beater that is worth only $200 for its scrap metal value – you wouldn’t buy collision coverage with your auto insurance. It would pay you nothing if your beater were totaled in an accident. You should have liability insurance, however, in case you are at fault in the accident! That’s a huge risk with potential for catastrophic loss. What are some of the huge risks that you should share with an insurance company?
- Loss of life (term life insurance)
- Loss of health (health insurance)
- Loss of common sense – risk of making a stupid mistake (liability insurance)
- Loss of income (disability insurance)
- Loss of or damage to your house (property insurance)
- Loss of or damage to your car (auto insurance)
- Loss of ability to take care of yourself at home (long-term-care insurance)
- Loss of identity (identity theft coverage)
Notice that I said, “share with an insurance company” about these insurance policies. Elimination periods, deductibles and co-pays that are your responsibility show the insurer that you’ll be doing your part to stay out of risky places. If you stand to lose something then you might be more careful about protecting yourself against these losses.
What about insurance for the LGBT community? Are our decisions about insurance any different or unique? The main concern with LGBT folks is the assumption that we may be legal strangers to our “chosen family” and/or to our loved ones or partners. Insurance protects our loved ones against a financial loss that would be created if some catastrophic event happened to you. Heterosexual spouses/families have some protection afforded them by the law.
For example, if you are in a same-sex relationship and your partner owns the house you two live in – you are “legal strangers” to each other. You need to make sure your own belongings are covered against loss in a fire or theft. Your partner has this coverage because s/he owns the house (and hopefully has homeowner’s insurance). Some insurance companies consider the non-owner partner (not named on the house or on the insurance policy) as a stranger. You might need “renters insurance” to cover your belongings if this is your situation. Find another insurance company if you can’t be sure that both of your belongings are insured against loss on the policy.
Life insurance, for another example, can help your lover cope with the financial stress that may occur if you die. If you have life insurance and name your lover as beneficiary then your lover will have financial help when you die. Straight couples get to automatically pass their wealth to the other, by law, if one dies. If you are straight and have life insurance (or other financial assets) without naming a beneficiary, the proceeds would go to your estate. By law, your legal spouse would get the proceeds. LGBT couples need to name beneficiaries to pass wealth to a “legal stranger.” A will can be considered a form of insurance in this case, for LGBT partners. Your will insures that your partner will get whatever you designate when you die.
There are some kinds of insurance that you don’t need. These fall into the category of “rip offs.” Most of these rip-offs protect someone else. Insurance is a good buy if it protects YOU, the insured, or your loved ones. Be careful that you don’t agree to these:
- Cash value life insurance (this is a bad investment - buy term and invest the difference)
- Credit life insurance (protects the credit card company by paying off your balance if you die – the death benefit should go to your beneficiary so they can decide what to do with it)
- Credit disability insurance (protects them if you become disabled and can’t make payments)
- Mortgage life insurance (pays the mortgage company if you die)
- Children’s life insurance (not much loss of income upon their death unless they are a highly paid actor or model)
- Accidental death and dismemberment (you want life insurance to cover you for ANY death, right?)
- Accident insurance (AFLAC – you want your health insurance to be all inclusive – it already covers you in an accident)
- Cancer insurance (your health insurance better cover cancer!)
- Travel interruption insurance (unless there is a good chance you might not take the trip)
- Flight or travel insurance (if you charge your trip – your credit card company provides nice coverage – check to be sure)
- Rental car coverage (your own auto policy covers rental cars – check to be sure)
- Extended warranties (if something is going to break it will do it during the regular warranty period)
Insurance can be a tricky issue. Be very careful to have those big risks covered. One accident or incident could wipe you out if you insist on “self insuring” for a catastrophe. And, be sure to get the coverage when you know you don’t need it. You can’t get a fire policy, for example, if the roof is smoldering. If the insurance company even smells a risk - they won’t touch you.
Chris Olson is a certified financial planner™ with a fee-only practice. You can reach her at CMOney@centurytel.net or (608)-525-9818.