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Having the Right Insurance — Part II

Having the right insurancesHaving the right insurances in place is part of having a healthy financial plan. I talked about Health, Life, and Disability insurance in the previous post. Let’s look at a few more that you should consider having like Auto Insurance, Homeowner’s Insurance, Renter’s Insurance, Umbrella Liability Insurance, Long-Term Care Insurance, and Identity Theft Protection.

Auto Insurance

You need auto liability insurance if you want to drive on public roads. Auto liability insurance is for when you cause an accident and cause damage to other people and/or their property. You are responsible for any damage you cause.

Collision insurance is when you damage your own vehicle. If you’re driving a vehicle that doesn’t cost much to replace and you have an emergency fund in place to pay cash for your next vehicle, you can consider dropping your collision insurance on that vehicle. However, collision insurance for people with good driving records does not cost that much. On one vehicle that I bought for $10,000, the collision insurance costs me about $50 a month. That’s $600 a year. I need to go 15 years without turning in a claim in order to save $10,000 to buy another vehicle that’s comparable to the one I have. I have determined that it is better for me to pay the $50 a month in order to have this coverage on my vehicle.

Each state has minimum auto liability insurance requirements, and it varies from state to state. Just because there is a minimum required by law doesn’t mean you should get the minimum. Remember, insurance is part of your defensive game plan for building wealth.

Most policies have a maximum amount it will pay per person who is injured, a maximum to all people injured, and a maximum amount per accident for property damage. These numbers are usually represented like “10/20/10” and are in thousands of dollars. Consider getting a 100/300/100 policy as your minimum.

There are many discounts you can get if you qualify. If you do not drive all that much, you could qualify for a low mileage discount. With my insurance provider, if you drive under 6,000 miles annually, you qualify for a big premium reduction. Other discounts are given when you bundle your auto insurance with your homeowner’s or renter’s insurance, multiple vehicles, multiple drivers, or if you are over 25. Talk with your insurance agent and get some quotes from other providers.

Homeowner’s and Renter’s Insurance

Your house is going to be your largest asset in most cases. Very few people can afford to have their house destroyed. Make sure you have adequate coverage on your house. Do not assume that your homeowner’s policy covers everything like fire, wind, or flood. Talk with your insurance agent to understand what your coverage is and to make sure it’s adequate.

Renters insurance covers the contents inside the building you are renting. It covers your own contents. Most landlords require you to have renter’s insurance, but even if they don’t, if you cannot afford to replace everything you own, then you need renter’s insurance. This is the same as the portion of a homeowner’s insurance policy that covers personal belongings. Do not make the mistake of thinking that your landlord covers your personal belongings.

Umbrella Liability Insurance

An umbrella liability policy gives you additional liability coverage above your home and auto insurance limits. Your insurance provider may require you to increase your auto and homeowner’s insurance levels to $250,000 when adding an umbrella policy.

If you have significant assets, you should consider having an umbrella policy. Umbrella liability insurance does not cost that much, and you should consider having a minimum of a $1,000,000 policy. As your assets increase, you should consider increasing your liability coverage.

Long-Term Care Insurance

Long-term care insurance is a must if you do not have the required assets to be able to support yourself if you require long-term care. Until you get to that point, it is recommended that you have a policy in place before you turn 60. The best situation to be in is to be able to have enough assets so that you can support your care and not have to buy an insurance policy. There’re only four things you need to do to get to that point.

In some cases, you might need to buy a policy for your parents if they are in a financial mess and cannot afford this. Before it gets to that point, help them get on a plan for their money so they can afford the required care.

Identity Theft Protection

This isn’t insurance but consider having identity theft protection. You can monitor your own credit report to see if thieves open credit in your name, but the main reason for having identity theft protection it’s so that you do not have to spend a bunch of time cleaning up the mess that someone has made for you. If you are working 80 hours a week trying to get out of debt or trying to save your emergency fund, then you really have no additional time to bother with cleaning up a mess if your identity is stolen. If you carry identity theft protection, make sure restoration/recovery services are part of what you are buying.

Another option is to freeze your credit. This doesn’t entirely prevent someone from opening new credit in your name, but it can help. If a financial institution offers credit without checking a credit score, then they could still offer credit to someone in your name. This also doesn’t prevent someone from using your current credit for fraudulent activities. You can place a fraud alert on your credit to help with this. Go to the three credit reporting agencies websites to freeze or to put a fraud alert on your credit. Find out more on the Federal Trade Commission website.

All these insurances are part of your defensive strategy for building wealth. Insurance is not designed to make you rich. If an agent is selling you a policy by convincing you that it will make you wealthy, then tell him to take a hike. Go find another agent. Your income is what makes you wealthy. Not some complicated Insurance gimmick. Buy only the insurances that you need. Use the rest of your money to pay off debt, save, and build wealth.

 

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