Dave Says: Buying Insurance

Dear Dave,

I’ve got auto insurance, but can you tell me what other kinds of insurance are good to have?

Chris

Dear Chris,

The purpose of insurance is to transfer risk that you can’t afford to take. Most people can’t afford to have a heart attack and triple bypass surgery. Having to pay for something like that completely out of pocket would bankrupt just about anyone. That’s why health insurance is a vital part of any good financial plan.

It’s also important to have auto, which you do, and homeowner’s insurance, too. If you don’t own a home, make sure you have renter’s insurance instead. Don’t forget about life insurance, either. If you’re married or have kids, you should carry eight to 10 times your yearly income in a good, 15- or 20-year level term life insurance policy. This means if you make $40,000, you should have about $400,000 wrapped up in life insurance.

Long-term disability insurance is vital. The cheapest way to get this is in a group. If you buy it yourself, out on the open market, you’ll find that the rates are based more on your occupation than your age or health. So, if you fly a desk, it’ll be a lot cheaper than if you work with your hands.

And don’t forget long-term care insurance. You need “nursing home insurance” the moment you turn 60. It will also take care of you in your own home. The statistical probability of needing it before age 60 is about one percent, so I’d wait until then to buy long-term care insurance.

This kind of insurance can make sure you get the kind of care you want in your declining years. Plus, it can keep your nest egg with you and your family and out of the hands of the nursing home!

—Dave