It seems everyone has advice about insurance. You'll get a lot of tips and warnings from relatives, friends, and even total strangers. But how do you know what to believe?
In this article, we'll go over a few pieces of bad insurance advice that you probably heard at one time or another and lay out the facts for you.
Minimum Auto Liability Coverage is Enough
Liability insurance covers you if you are sued by someone else for damage you caused in a collision (to learn what happens next, see Insurance and Lawsuits: What Happens When You Are Sued). All 50 states have laws that set out the minimum liability coverage for car insurance. This minimum can be as low as $10,000/$10,000 (in Florida), or as high as $50,000/$100,000 (Alaska's minimum). What do those numbers mean? The first figure is the amount of coverage available if only one person sues you for injuries, and the second one is the total available if more than one person does (which is not impossible – you can do a lot of damage with your car).
Those minimums might look big on paper, but they're far below what should be considered sufficient. If a person is seriously injured in an automobile collision, the medical expenses alone can easily exceed $100,000, leaving you on the hook for a huge amount – even in Alaska.
And medical expenses might just be the tip of the iceberg. If the injured person suffers a loss of income because they can no longer work while undergoing treatment and recovery, the total damages could exceed half-a-million dollars. That $10,000 minimum looks pretty scrawny now, doesn't it?
Also, for many insurance policies, your uninsured and underinsured motorist coverage will match your liability coverage. This is coverage that insures you if you're injured by someone who doesn't have (or doesn't have enough) insurance. If you suffer $500,000 worth of damages but the motorist found at fault only has enough coverage to cover $15,000 of it, you'll be glad to be able to recover the rest from your own policy.
So, if those minimums are way too low, how much should you get? I recommend getting no less than $500,000/$1,000,000 in liability coverage. Yes, a million dollars looks like an astronomical amount, but you'll be pleasantly surprised to learn that getting that much coverage isn't much more expensive than settling for the minimum (learn more in Auto Liability Insurance: How Much Is Enough?).
You Only Need Liability Coverage on Your Car Insurance
In many states, liability coverage is the only type you're legally required to have on your car insurance. But that doesn't mean it's a smart idea to drive around without a beefier policy.
If you own anything more than an old clunker, you might want to consider getting collision and comprehensive coverage for it. Collision insurance will cover damage your car sustains from, say, hitting a tree or another vehicle if the collision is your fault. If your car is only worth $1,000 or so, this kind of coverage might not make sense because you'll be paying a significant percentage of the value of the car just in premiums over a few years. But if it's worth closer to $4,000 or $5,000, look into it.
The same reasoning applies to comprehensive coverage. This covers you for losses from things like theft and flooding (for related reading, see 9 Ways to Keep Your Car from Being Stolen). Would losing your vehicle make a substantial dent in your savings account? Then you might want to make sure it's covered for more than liability.
There's No Point Buying Insurance from a Rental Company
Well, it depends.
Some personal auto insurance policies provide excellent coverage for when you rent a car. But then again, some don't. It’s a good idea to read your policy carefully and discuss it with your broker or agent. Get a good idea of what exactly you're covered for when you rent a car. If it's not enough, getting a policy from the rental agent might be a good bet.
And if you use your credit card to rent the vehicle, you might be surprised to find out that the credit card company might have you covered. This coverage is usually extremely limited, however, and might only include collision with no liability coverage (your credit card likely offers other benefits, see 9 Insurance Perks Your Credit Card Provider Might Offer).
One advantage of getting a policy from the rental company is that it will cover just about everything, so you don't have to worry about damage to the vehicle or towing charges. The downside is that they're expensive. So, figure out what your auto policy and credit card provider already cover and see whether it's worth paying to make up the difference (learn more in 5 Rental Car Insurance Tips Worth Knowing).
Don't Worry, Your Homeowner's Insurance Covers Water Damage to Your Home and Furnishings
When it comes to water damage, it all depends on what caused the damage. A pipe bursting and swamping your house while you're away on vacation will almost certainly be covered. And if a tree falls on your house and rain pours in, you're almost always covered for this (but in a few states, including Texas, Louisiana, and Florida, you'll need a windstorm policy if the tree fell because of heavy winds).
But what if a nearby creek overflows and the water seeps into your home? If you've got a standard homeowner's or renter's policy, you're out of luck. This kind of damage is only covered by a separate flood policy (but it's not a perfect solution – check out Water and Flood Insurance: 6 Things that Aren't Covered to find out why).
Reviewing Your Home Insurance Coverage Every Year Is a Waste of Time
When you bought your home, you sat down with an insurance broker and figured out what kind of coverage you'll need. Since then, you've been all set... Right?
But what about the renovations you did last year? Or the jewelry you inherited a few months ago? What about the expensive home theater system you set up? And the home values in your area, are they rising?
If any of these factors (and more!) have come into play since you first purchased your policy, it could affect the amount of coverage you need (learn more in Home Renovations When Do They Make a Difference for Your Insurance?).
Take some time each year to sit down and review what things have changed and compare it to the coverage you have. Does your coverage still look decent or is your home insurance in need of an update?
You Don’t Need Life Insurance Because...
Almost everyone needs life insurance, but a lot of people don't bother getting it. I've heard every excuse in the book.
"If you die, you can't take it with you."
That's very true. But even though you're the one insured by the policy, it's not really for you. If you're the primary breadwinner in your family, especially if you have children who still live at home, how will they get by without your income? Will your children be able to go to college? Will your spouse be able to stay home and care for the children or will they have to immediately find full-time work?
Even if they might scrape by without your contribution, chances are you don't want to leave them on the hook for all the funeral expenses and other adjustments (see A Look at Burial Insurance if you're still looking for an alternative).
"You don't bring in any income."
Even if you don't have formal employment or bring in any income, I'm willing to bet you do something for the household. If you take care of children, make sure the chores are done, or even act as a de facto secretary for the household breadwinner, someone will have to take your place when you go. Without life insurance, how hard will it be for your family to adjust to the added expense of childcare, house cleaning, or having to hire a full-time assistant?
"You're only 25, you won't die anytime soon."
While I admire the level of confidence behind that statement, it's really impossible to predict when anyone will die. We'd all love to live well into our rocking chair years, but tragic misfortune can cut even the healthiest and most cautious life short.
And because you're less likely to have significant savings or assets, your family and dependents might need the life insurance benefit more because you're only 25.
And here's something to keep in mind: your insurance rates will be far cheaper while you're still young. If you get a 30-year term life insurance policy at 25, your premium will be a fraction of what it would be if you purchased a life insurance policy at age 50. If you wait that long to get your life insurance policy, you'll kick yourself when you see the kind of premium you'll have to pay for the same coverage (find out what is The Perfect Age to Get Life Insurance).
Don't Bother with Disability Insurance
At the age of 30, when you're still early in your working years, you are four times more likely to be disabled than to die before age 65.
Not every disability will keep you from working for the rest of your life, but some will – or at least force you to go into a different and possibly less profitable line of work. If that's the case, you want to make sure that you're taken care of, either permanently or while you recover.
Employer-provided disability policies are often minimal, and if your employer is the one paying the premiums, anything you collect will be taxed. For people with children especially (but not only them), a private disability policy can be an excellent idea (to make sure you're getting the best coverage, consider these 12 Disability Benefit Riders to Improve Your Coverage).
When it comes to insurance, everyone has opinions, but not all of them are informed or wise. Don't trust just anybody; get advice from a knowledgeable insurance professional.