Understanding Insurance – Part One

The following two tabs change content below.
Jonathan graduated with a degree in Business Administration from Ouachita Baptist University. He also holds a Masters in Business Administration from the University of Texas at Arlington. While he works for a contractor buying specialized tools, his passion is personal finance, frugal living, blogging, and stewardship.

We are all exposed to different types of risk in our lives. Practically speaking, insurance is an effective way to limit risk. It’s very important to understand how insurance works and how you can reduce risk in your life.

In an emergency, an emergency or rainy day fund covers you in case of an emergency. Emergencies can and will happen. Your emergency or rainy day fund is a form of insurance. There are other insurances you need beside an emergency or rainy day fund though.

What is the purpose of insurance? The purpose of insurance is to transfer risk from you to the company insuring you. You cover the little expenses and get the insurance company to cover the big expenses.

Without proper insurance, some losses can cost you hundreds of thousands of dollars or even bankrupt you.

There are a wide variety of insurances you should learn about. This will be a at least a three part series I’m going to do in December about various types of insurances. Today, I’m going to mention Auto Insurance and Home or Renter’s Insurance. I’ll also briefly mention a written will although I think the subject is important enough to warrant it’s own article.

Insurance & Risk

Auto Insurance 

This is a bit of a no brainer here. Everyone who owns a vehicle should have auto insurance. There are two basic types of auto insurance which are liability and comprehensive coverage. Legally, you are required in the United States to carry liability coverage. Ensure you are carrying adequate liability. If you are in an accident that is considered “your fault” this type of insurance covers to get another person’s car fixed or their medical bills. If you don’t have liability insurance you would have to pay for those costs yourself. This could be devastating and lead to lawsuits.

If you have a fully funded emergency fund you can raise your deductible.

A fully funded emergency fund is typically 3-6 months’ worth of expenses or more. If you have older vehicles consider dropping collision. Instead, assuming your car is paid off, pay yourself a car payment every month. If you have enough money saved up to replace the car then you don’t need collision coverage for your vehicle.

Need to find someone to help you with auto insurance? Fill out this contact form and one of Dave Ramsey’s Endorsed Local Providers’s will contact you.

Homeowner’s and Renter’s Insurance

If you own your home or have a mortgage you need good homeowner’s insurance. Hopefully, you also have at least 3-6 months worth of expenses to cover emergencies. Homeowner’s coverage should be guaranteed replacement cost of your home if at all possible. Renters insurance is cheap as well and a must if you’re in an apartment or rent your house.

Deductibles

Lets talk deductibles for moment. Let’s say you’re going from a $500 to a $1,000 deductible. That’s a $500 difference. By raising your premium, you risk having to pay $500 more out of pocket if something happens to your home. If your emergency fund is in place this might be worthwhile to you.

Say in this example that raising the premium would save you $50 a year. Basically it would take you 10 years without a claim to break even. But if you save $300 a year in premiums, you only have to go two years without a claim to be ahead. So that would be a good value. Take a look at how much risk you are taking.

Is it worth the risk and does it make sense to increase your deductible?

Liability and Guaranteed Replacement Cost

Regarding liability you should carry at least $500,000 coverage. Many years ago companies started dropping guaranteed replacement cost coverage on homes. This is where you home is replaced no matter what the cost.

A lot of insurance companies have now put a dollar amount on the policy. Typically this is for the value of the house at the time of purchase of the insurance plus 25% of the home value. So if you bought a $200,000 house you would get $200,000 worth of coverage. The value of houses typically increases over time and say in a few years the house is worth $300,000. Your home would be covered for $250,000 and if something were to happen to your home you would have to cough up the $50,000 to replace your home.

Remember the reason you have home owners insurance is to transfer risk to the insurance company.

Does your current home owners insurance cover the market value of replacing your home?

Suggestions: 

  • Opt to take higher liability limits on your home and auto policies. This provided protection against lawsuits that can cripple your finances.
  • Always compare higher deductibles on both your home and auto policies to see if there are potential savings.
  • Always try and get guaranteed replacement cost on your home’s real property coverage.
  • Drop collision on older cars if the savings makes sense.
  • As your assets grow get an umbrella liability policy to protect your family.
  • If there are extra discounts that make sense combine home and auto coverage with one company.

Need to find someone to help you with home or renters insurance? Fill out this contact form and one of Dave Ramsey’s Endorsed Local Providers’s will contact you.

A Written Will

One of the best gifts you can give you family is to get a written will. Estate planners indicate that about 70% of Americans die without a written will. Having a written will make the management of your estate very clear and a lot easier for your family. Have all your documents in order as a gift to your spouse and family. Again, I think the subject is important enough to warrant it’s own article.

In the near future, I will also be sharing with you a concept called FLO or financial life online.

Further Resources:

Find one of Dave Ramsey’s endorsed local provider near you today!

Why use an Endorsed Local Provider (or ELP)?

* * *

When was the last time you shopped around for home, renter, and auto insurance? Do you have a written will?

Lets Connect with Social Media!

Visit Us On FacebookVisit Us On PinterestVisit Us On TwitterVisit Us On Google PlusVisit Us On LinkedinCheck Our Feed
About Jonathan Key 112 Articles
Jonathan graduated with a degree in Business Administration from Ouachita Baptist University. He also holds a Masters in Business Administration from the University of Texas at Arlington. While he works for a contractor buying specialized tools, his passion is personal finance, frugal living, blogging, and stewardship.

34 Comments

  1. We have good home, auto and health insurance. I do need to get on the will thing, though. We don’t have one right now.

  2. I’m still a little bit confused about some, but it’s really important. I see the benefits that go with investing in an insurance.

  3. for the first time in years we had to buy renters insurance. We own 2 houses in an other state (we moved) so we still pay all the insurance for those properties as well

  4. We also do Dave Ramsey’s plans – and we got all our insurances in order during this financial freedom plan – it’s amazing how much we were able to save and still get better coverage. Great post!

    • Caroline thanks for the encouragement! I’d suggest to do some research into thousand 16 so you can better be prepared for any changes you might want to make in 2017. Thank you for reading!

  5. Jonathan-
    I love your blog so much! I have really benefited from your articles. I have been thinking about re-evaluating my home insurance – and this really helped. Thank you so much!

    • Sam thank you so much for the encouragement! Your blog is so fantastic as well. I’m glad you found the articles useful. It’s great to get feedback from others in this manner. I hope you are able to find a good deal on your home insurance. Thanks for stopping by!

    • Hi Ifeoma thanks for checking out the blog! I will check to see if maybe your comment might have gone to the spam folder by accident. I’m glad you found the content useful and hope you come back for the other posts in this insurance series. Thanks for reading!

Leave a Reply

Your email address will not be published.


*


CommentLuv badge