Step No. 2: Insurance

Insurance is a great way to cope with life’s major financial risks—dangers such as getting sued, suffering a disability or dying prematurely and leaving your family in the lurch. Think of it as a way of pooling risk. You buy coverage from an insurance company, but what you’re essentially doing is tossing dollars into a pot with other people. Those who suffer misfortune collect from the pot. Everybody else gets nothing back, which is usually what you want, because it’s a sign that life is good.

While insurance is a great way to fend off life’s major financial risks, it’s far less appealing as a way of coping with lesser threats or when it’s twinned with some sort of investment vehicle. We’ll discuss this notion further in the sections that follow as we tackle the eight key types of insurance: health, life, disability, long-term care, auto, homeowner’s, renter’s and umbrella liability.

Any one of these policies might be affordable. But if you buy them all, you may find yourself blowing the family budget—unless you think carefully about how to tweak each policy. Those tweaks might include buying no more coverage than is really necessary, raising deductibles and opting for long elimination periods. The latter is the time you have to wait between making a claim and starting to receive benefits. The goal is to make sure you’re covered for the major threats that could derail your financial future, while standing ready to pay smaller costs out of pocket.

One housekeeping tip: Make a point of keeping the latest copy of all insurance statements, and let family members know where they’re located. Unless you have an outstanding claim or expect to make one, there’s no need to keep old insurance policies.

Next: Health Insurance

Previous: How Big an Emergency Fund?

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