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Are you insuring the things you really should be insuring? How much risk should you take? Check my blog.

June 6, 2011
by Jack Reynolds

Are you insuring the things you really should be insuring? How much risk should you take?

There was a story on NPR this morning about a man in Munson, Massachusetts who rents his home and who chose not to carry tenant’s insurance. He thought about it and decided against it. As he remarked to the interviewer, “What are the chances of a tornado in western Massachusetts?” The chances are low. He was completely wiped out.

Later this morning a colleague explained that she does not have, or need, long-term care insurance. She is about 40 and plans to invest as much as she can in her 401(k) to self-insure, rather than buying long-term care insurance.

This weekend a friend asked me about disability income insurance. He said that he has a good investment program. He sets aside money every month in his investments and says that he is doing well with them. He remarked that, “Anything I spend on disability income insurance would be a waste. I’d pay the premium, get nothing back and have to reduce my savings/investment program.”

In reviewing a client’s insurance portfolio I found that he has a life insurance policy issued by a company that has a terrible credit rating. When he bought the policy the company was fine, but it isn’t now.

I have a few suggestions:

  • Self-insure what you can afford to self-insure, by way of example:
    • Increase the deductible on your auto insurance (maybe a lot), and
    • Increase the deductible(s) on your home owners policy(ies) (maybe a lot)
  • Insure what you cannot reasonably afford to self-insure, e.g.:
    • Have an umbrella policy, which is inexpensive, and makes sure that your entire assets/investments won’t be wiped out in litigation,
    • Have disability income insurance with carefully thought-out deductibles and elimination periods to reduce the cost, making it affordable,
    • Think hard about whether you really have the resources to self-insure your long-term care in our senior years, and
    • Work with a really good insurance agent to be thoughtful about integrating the limits of policies that relate to each other (e.g., auto, home and umbrella).
  • Be sure that you have excellent insurance carriers, e.g.:
    • Some property and casualty insurers are notoriously bad about paying claims, and
    • Your long-term care insurance will not be helpful if the carrier cannot pay the benefits when the time comes because it is not strong enough, or even bankrupt.

How do you handle insurance?

What are your answers to the questions in the title above:

  • Are you insuring all the things that you really should be insuring?
  • How much risk should you take?