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INSURANCE 101: What type of safety net you really need

By Timothy J. Gibbons
Published by Florida Times-Union on August 1, 2004.

First, let's get this out of the way: This might not be the most gripping story you've ever read.

Wait, wait! Come back!

We know that reporters aren't supposed to admit things like that, but this week, we're hoping you'll stay for the information, not for the enjoyable read. This isn't a story; it's a primer, a basic guide to the hard facts you need to know about insurance. It's to let you know what type of safety net you really need and what you can forego. It's aimed at 25- to 35-year-olds and designed to answer the questions that you might not even know you have.

You might not need the answers now. You might cut this out and stick it in a file drawer for a few months or years, until you get that new job, buy that new house, have that new baby. No matter. The information will be there when you need it.

Life
The main thing to keep in mind while considering life insurance is what it is for: Simply put, life insurance is designed to compensate for the loss of income that follows quickly upon loss of life.

So, to be somewhat less than delicate, if you're the only one depending on your income, you probably don't need much life insurance. And, despite the ads selling life insurance for infants, most children are not generating income that would have to be replaced. (Do keep in mind, though, that although stay-at-home parents might not be making money, their contributions of child care would have to be paid for if they passed away, meaning that life insurance on both spouses might be a good idea.)

Some agents advise everyone to get at least enough insurance to cover burial expenses; before making this decision you should think about the financial shape of your likely survivors and how elaborate of a funeral you'd like.

How much insurance you get beyond that basic very much depends on how much income you'll need in the future. A family with two kids, for example, might want to get insurance that would help cover college costs 15 years down the road, even though that's not a current expense. It's not unusual to look at benefits that are 15 to 20 times annual salary, said Howard Drescher, spokesman for LIMRA, a life insurance industry research group

The two main types of life insurance are term and whole life, and there is some debate -- primarily among insurance agents -- over which you should get. Term insurance is similar to renting life insurance: You pay the premiums for a certain time and your survivors get the benefit if you die while it's in effect. You're not building up equity, on the one hand, but you have much lower premiums than whole life, the other option.

Whole life is an investment as well as a way to provide for survivors because as you pay the premiums, you build up a cash value, meaning the policy is actually worth money that you could, for example, borrow against it later in life.

A 28-year-old nonsmoker would pay about $15 a month for a 20-year term policy with $250,000 in coverage. A similar whole life policy would cost about $240 a month.

Term life premiums jump when the policy holder is older -- a 48-year-old would pay about $50 for the same policy -- while whole life premiums typically stay the same, meaning you'll pay more for whole life now and more for term later. One suggestion: Buy term insurance and invest the difference -- but only if you have the self control to actually stick to the savings plan.

Health
The health insurance industry has a name for 19- to 29-year-olds: "The Invincibles." This age group is the most likely to go without insurance, either figure they don't need it or they can't afford it. This, of course, can backfire if an emergency crops up.

If you don't have a job or don't have one that offers insurance, experts advise opting for one of the value-priced plans, usually with high deductibles, such as HumanaOne's $5,000-deductible plan, which costs about $70 a month for a 28-year-old non-smoking woman. These plans are usually cheaper than Consolidated Omnibus Budget Reconciliation Act (COBRA) coverage, which can run upwards of $300 a month, What if you do have a job? You might get to choose from the three major types of managed care plans: HMOs, PPOs and POS plans. The pros and cons of each:

Car rental
Do you really need car rental insurance? Short answer: Maybe. The key is to make a few phone calls before going on vacation to find out.

First, if you own a car, talk to your insurance agent, because it's likely that your auto policy will cover rental cars. (They probably even mentioned this when you signed up, but, eh, who remembers?) Keep in mind, though, that you might be renting a more expensive car than you own, and if you don't have collision and comprehensive insurance on your own car, you won't have it on the rental.

Next, call your credit card company -- and make sure it's the credit card you plan on actually using for the rental. Keep in mind that credit cards often don't insure vehicles travelling outside the country, so be careful if you're by the border.

Auto
Florida drivers are required to have Florida's minimum coverage of $10,000 personal injury protection, which covers injuries to people in your car, and $10,000 property damage liability, which covers damages to other people's property.

Generally, you're not required to have bodily injury liability -- which covers injuries to the other driver -- although not having it can leave your personal assets at risk if you seriously injury another driver. By waiving bodily injury insurance, said Bob Long, division manager for AAA in Ponte Vedra, you're saying that you can cover $20,000 of the other person's medical bills, a possibility that many drivers aren't aware of.

His advice: Get $50,000 in bodily injury and $25,000 property damage liability coverage per accident.

Collision and comprehensive insurance protect your car: Collision if you hit something, comprehensive if your car is stolen, vandalized or has glass broken. While banks generally required these if your car is financed, Long says that if your car is more than a decade old, you can probably forego them, since you'll pay more in premiums than the car is worth.

Other forms of insurance that are a good idea if you have the money: rental reimbursement, which runs about $30 a year and covers the cost of a car when yours is disabled; and gap insurance, at about $25 a year, which covers the difference in value between what your car is worth and what you owe if your car is totalled.

For a 25-year-old single man with a good record, all of that would cost about $223 a month. A woman would pay about $209. (Female drivers are considered "adults" by the insurance company at 25 years old; males have to wait five more years.)

Information for this story was provided by LIMRA International Inc., America's Health Insurance Plans, Florida Department of Highway Safety and Motor Vehicles, Independent Insurance Agents & Brokers of America and AAA.


About

This is a showcase of the work done by Timothy J. Gibbons during a journalism career now stretching back more than a decade.

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