Sunday, January 20, 2013

The Role of Insurance

Today's lesson for Financial Peace University was all about protecting your health, family and finances with different types of insurance   One key to financial peace is to understand the purpose of insurance and know what types of insurance you need and which ones you should avoid. The main purpose of insurance is to transfer risk from you to another entity.  If you don't have the right types of insurance you could end up in bankruptcy.

Dave talked about 7 basic types of insurance people may want to buy.
  1. Auto Insurance: You need to make sure to have enough liability insurance (Dave recommends $500,000).  
  2. Homeowner's Insurance: You want guaranteed replacement cost insurance, but if you can only get extended replacement cost make sure to keep your policy up-to-date with the current value of your home.  If you are renting make sure to get renter's insurance.  
  3. Health Insurance: You need to make sure to have health insurance to cover the big stuff, so make sure never to decrease the maximum pay.  Today health insurance is an increasing changing topic, so make sure to check out Dave Ramsey's page or do your research before buying a new policy. 
  4. Disability Insurance:  One in three people will end up qualified for disability at some point in their life, while only 2% of people think they may ever end up disabled.  You should buy long-term disability insurance, short-term disability is what your emergency fund is for.  
  5. Long-Term Car Insurance:  If you are over 60 and have built any level of wealth this insurance if for you to protect your assets for your spouse or heirs.  69% of people who are 65 today will need some form of long-term care.  Dave recommends you buy this the day you turn 60, but never before that.  
  6. Identity Theft Protection: Do not buy protection that only provides credit report monitoring, it needs to include restoration services so they will do the work to clean up the mess if your identify is stolen.  
  7. Life Insurance: The purpose of life insurance is to replace your income if something would happen to you, so you needs about 10 times your income in level-term insurance. Dave Ramsey said that whole life insurance is the payday lender of the middle class.  The returns are low, the insurance keeps the cash value of your policy when you die and the fees are very high.  According to SmartMoney magazine, Dave Ramsey and a calculator, "the right type of life insurance can be summed up in a single word: term".  Check out the math behind this on MoneyPlan SOS's site. 
What should you avoid?
  • Credit Life and Disability  
  • Cancer and Hospital Indemnity Insurance
  • Accidental Death
  • Pre-paid Burial Policies
  • Mortgage Life Insurance (unless your otherwise uninsurable) 
  • Return of Premium/Wavier of Premium Options


  1. As you said, insurance transfers risk to the insurance company. I think insurance is necessary and important. I have often said that the only way you win with insurance is by losing. That is to get money back, you need to have a loss.

    David Wilkinson

  2. You are right David. In order to "win" or end up getting your money back, you have to have a "loss" of some sort. It is the type of stuff you need to buy and hope you never have to use.