(Consumer Reports)--There’s really only one reason to buy any kind of insurance: To protect yourself from financial loss that you can’t, without hardship, handle on your own. For most people that means buying life, disability, health, and car insurance. Here’s a look at how to adequately insure a young family without breaking the bank. We also look at car insurance for teenagers, if you have kids at that stage.
A new baby is a celebration of life, but also the beginning of a long-term financial commitment. To be prepared for the unthinkable, you need life insurance, and enough of it.
Life insurance provides income for your dependents—children and possibly a spouse—if you die. In most cases, both spouses should have policies, even if one of you doesn’t work outside the home. That’s because the spouse who is home probably takes care of the kids and the house, services you’d have to pay someone else to do if that spouse died.
But it’s important to evaluate how long you will need the safety net of life insurance. If you have kids in college and are still paying a mortgage, then it’s a good idea to continue to insure the life of both spouses. Then, once your mortgage is paid off and your kids no longer need financial support—and assuming you have been saving all along for retirement—you shouldn’t need the added expense of life insurance.
There are three main questions you need to ask to get the best value for your insurance-premium dollar: Which type? How much? What's the best place to buy it? Read on for answers.
Which type of life insurance?
You may hear several different names, and there are nuances, but it really boils down to two major types of life insurance—term and permanent. Term life insurance provides a death benefit if you die within a set number of years and typically provides nothing if you live beyond that time. Permanent life insurance—also known as whole, universal, and variable life policies—is a mix of term life insurance and an investment account that pays a benefit when you die, or pays the built-up cash value if you liquidate it before your death.
The idea of a policy that will give you money while you’re still alive may sound tempting. And permanent cash-value insurance can provide estate-planning and tax advantages for well-to-do people over sixty. But permanent life insurance costs a lot more than term. “Term life is by far the insurance that will give you the best dollar benefit if you die,” says Greg Plechner, a certified financial planner and principal at Modera Wealth Management, an independent, fee-only financial firm in Westwood, New Jersey.
The higher cost of permanent insurance goes to fees and commissions associated with the investment part of the policy. But in many cases, the investment returns are neither transparent nor reliable. Insurance agents also tend to make bigger commissions for selling it to you in the first place. Parents with young children, who often need a lot of insurance and whose budgets are already being squeezed, can buy far more coverage, dollar for dollar, with a term policy. For young families, says Plechner, “term is the most affordable option when you need the most death benefit and when someone’s most dependent on you.”
To illustrate the difference, a $300,000 term insurance policy for a 35-year-old nonsmoking male in Illinois from one well-known insurance company would run between $370 and $783 per year, while a similar permanent “cash-value” policy from the same company would cost from $6,435 to $7,731 per year. The annual premiums on the term policy used in this example would remain the same for the first 20 years, and then be subject to an increase annually. Meanwhile, the premiums on the permanent whole-life policy would remain unchanged until the policyholder reached age 100. While that predictability may appear to be a plus, it’s a very costly plus, and by the time you’re 85 or 90, your children won’t need financial support the way they do when they’re young. Larry L. of Hingham, Mass., whose son is now 11, says he got a 30-year fixed term plan when his son was born. After that time, he says, “If I’m still alive, my son will have to start taking care of us!”
If you have extra cash to invest after buying enough term life insurance to take care of your family, there are better places for most young families to invest it than in permanent insurance. “A 401k is a homerun because it represents a way to reduce taxable income; and the money saved benefits from tax-deferred growth, which is rare and extremely valuable,” says Plechner. (Learn more about retirement saving.)
How much life insurance?
With a new baby in the house and all the financial demands that brings, you don’t want to buy more insurance than you need, nor too little, which could leave your family with less than they need if something happened to you or your spouse.
The goal is to figure out how much money will be needed to adequately support your children through college and your spouse through retirement. If you and your spouse both work and have been diligently saving for retirement, your life insurance needs very well may end once your kids are through with college and your mortgage paid off.
When calculating the gap between your family’s future expenses and how much money they’re likely to have available to meet those expenses, don’t forget to consider income sources besides paychecks. For example, if you have assets such as rent-producing real estate, or a substantial amount of money in stocks or mutual funds, you probably need less life insurance.
Your best bet: Work the numbers with the help of a “fee-only” financial planner (one who charges a fee for his or her services)—not the kind who earns commissions from selling you a particular type or brand of insurance. To find one, check the National Association of Personal Financial Advisors, whose membership is made up of fee-only planners from across the U.S. There are also online life-insurance calculators. We like the one provided by the American Institute of Certified Public Accountants.
The “simplest formula,” Plechner suggests, is to multiply your gross annual salary by 10 as a minimum threshold for how much insurance to get. But he cautions that this is just a starting point in the process. Many other factors come into play, he noted, such as age, extent of personal assets, number of dependents, pensions, debts, expenses, and so on.
Where should you buy life insurance?
When you’re buying any type of insurance, look for a company that’s likely to be around if and when you need to file a claim. The last thing you want to leave grieving heirs is another hassle. Look for one with the very top financial-strength rating from an independent rating agency. We recommend you stick with the "A" ratings tier at TheStreet.com, available for free at www.thestreet.com/insurers/index.html, as well as the "AAAq" grade at Fitch and the "AAApi" grade at Standard & Poor's (note the "q" and "pi" designations).
While state-run guaranty associations are supposed to step in to protect policyholders if an insurer becomes insolvent, they may cover you only up to a certain limit. In most states, guaranty associations protect death benefits for up to $300,000, and cash surrender or withdrawal value of whole life policies and annuities for up to $100,000. Learn more in Is your life fully insured?
All else being equal buy life insurance by cost. Shop for the lowest rates using an online broker with ties to many insurers, not just a few. Some places to check: Accuquote.com, Selectquote.com, and FindMyInsurance.com, which let you search for quotes on term life policies, and LifeInsure.com, which brokers both term and permanent life.
Quotes from Internet brokers are estimates; premiums are ultimately determined after a detailed application and medical examination. You can also obtain cost comparisons through an independent insurance agent (the kind who sells more than one brand of policy).
You may also have access to relatively low-cost life insurance through organizations with which you already have a financial relationship, such as TIAA-CREF if you work in the nonprofit sector, USAA if you’re a retired military officer or family member of one, or the Vanguard Group or Fidelity Investments if you own shares in their mutual funds.
For related information, learn more more about group and individual life insurance plans.
Don’t insure your kids
Since the purpose of life insurance is to protect dependents, child life insurance is unnecessary. With Gerber Life’s Grow Up Plan, a whole-life policy that’s also pitched as a financial “head start” investment that accumulates cash value, premiums on a 2-year-old California boy can run from about $3 a month for a $5,000 policy to about $32 a month for $50,000. But it’s not even much of an investment. In 20 years you’d pay $1,602 in premiums for a $10,000 juvenile policy, but the guaranteed cash value would reach only $1,536. Unless your child supports your family in some way (say, as a child actor), you can opt out.
Who needs disability insurance? “Anyone who needs life insurance needs disability insurance,” says Steve Weisbart, chief economist and senior vice president at the Insurance Information Institute in New York City. “The basic idea is to replace an income that you depend on.”
Disability insurance actually is more crucial than life insurance, notes certified financial planner Greg Plechner. This is because the likelihood of someone becoming disabled and unable to earn an income at some point in his or her working life is greater than the likelihood of dying during the same period. Disability insurance is especially important for younger workers with dependents, but it’s good to have even if you don’t have dependents. It’s even more important for families that rely on one salary rather than two, Plechner said.
According to the American Council of Life Insurers, as many as one-third of people in the U.S. between 35 and 65 will become disabled for more than 90 days, and one in seven of them will be unable to work for more than five years—a long time to survive without a paycheck. Most cases are caused by illnesses such as arthritis, back problems, and heart disease.
If you’ve ever had health benefits at work you’re probably familiar with sick leave. Once your sick-leave is used up, short-term disability coverage provides employees who can't work with a percentage of that employee’s earnings or a fixed dollar amount for a fixed number of weeks. Generally, group long-term disability benefits start when short-term benefits are exhausted and continue anywhere from five years to life. Those benefits generally replace about 60 percent of salary. For Carolina, a mother of two young children, long-term disability was “very handy, since I was out of work for a whole year, and I was paid!”
Disability insurance falls into three main categories: employer-provided, private individual, and government-sponsored policies. Though not all employers provide supplemental disability coverage, it’s generally a good thing to sign up for when it’s offered.
Private individual policy underwriters, says Weisbart, “will look at your health and be more careful” than insurers providing employer-sponsored group coverage. But the advantage of an individual policy is that “if you later develop a problem or lose your job, you can keep it,” Weisbart notes. “It travels with you. If you have a job as a freelancer, it’s good to have it.” Most folks seeking an individual policy can expect to get no more than about 70% of gross income (about the amount you can expect from an employer-provided plan). Insurers will be worried about people who want too much.
Social Security has a disability insurance policy, “but it’s not something anyone should count on,” Weisbart cautions. The conditions needed to qualify are your inability to do any job, and a disability that lasts two years. He advises people to plan as though it’s not there.
If you choose to supplement a work plan, “Make sure your group plan benefit is not offset by an individual policy you’re considering,” suggests Plechner. In other words, if you want to keep your group plan’s benefit, read the fine print on both policies to make sure an individual policy does not prevent you from collecting from the group plan. And if you have group insurance through work, Plechner advises that you verify whether you (the employee) will pay the premium directly, so any benefits will be tax free. If your employer pays the premiums, any benefits will be subject to income tax payable by the employee.
Someone earning $100,000 might be able to buy coverage that pays up to $60,000 a year. If you get that coverage through employer-paid premiums, you'll net only $45,000 or so after taxes. Buying coverage with after-tax dollars can deliver untaxed benefits, increasing the amount you'll get to keep.
Should you get disability insurance even if you have debt? “Absolutely,” says Weisbart. “If you’re disabled and can’t pay off your debts, you’re in even bigger trouble.” You may get offered a disability plan through your credit card or mortgage lender, but “those don’t make financial sense,” says Weisbart.
Finally, if you have a choice, it pays to buy the insurance with the longest period of coverage you can buy. “The basic rule of buying is to insure against the most catastrophic stuff you could encounter,” says Weisbart. People may find disability insurance expensive, but “if you’re doing the calculations and ask yourself, ‘What’s the cost of doing without income for a couple of years?’” the coverage might make more sense.
Learn more about disability insurance and ways to protect your assets.
Your health insurance options vary depending on whether you have a job, have to buy insurance on your own, are 25 or younger, or have a pre-existing medical condition, such as a history of asthma or heart disease. Here is our advice. For more details about other situations, see our health insurance buying guide.
If you get insurance at work
Most people younger than 65 get health insurance through a job. Employee group plans vary enormously in cost and scope of benefits. To make the most of your plan, start by finding out who in your company administers it (probably someone in the human resources department, if there is one) and ask for a description, often called a Summary of Benefits.
If you have lost your job
Losing your job often means losing your health insurance, too. Fortunately, many people are able to continue coverage under federal law. The Affordable Care Act adds to those rights and protections, but the most significant additions won't take effect until 2014. Learn more about coverage options if you're unemployed, such as joining a partner’s plan, signing up for COBRA, individual insurance, Medicaid, veterans’ plans, and more.
If you are uninsured
If you're newly uninsured because you've recently lost your job, you have some rights you might not be aware of. But if you cannot afford health insurance, find out what you should know about ER visits, public programs, community health centers, and more.
If you buy on your own
Individual health insurance is the hardest kind to buy, because you can't rely on the expertise of an employer, union, or association to screen out bad plans. And without an employer to pick up at least part of the cost, individual insurance is usually the most expensive. Until the health care reforms are fully in place in 2014, you can be turned down or charged more for an individual policy in most states if you have a pre-existing condition. Learn more here about Buying insurance on your own, including how to screen out plans, what you need, and how to apply.
If you are 25 or younger
A key provision in the health-reform law allows young people to look forward to high school or college graduation without worrying about being kicked off their parents' health-insurance plan. Under the new law, children can remain covered by their parents' insurance up to their 26th birthday, even if they're no longer in school or living with them.
If you have a pre-existing condition
If you get your insurance at work (whether as an employee or dependent), you don't have to worry about being denied coverage because of a pre-existing medical condition. That's long been against the law. But it's a different story if you buy insurance on your own. In most states, insurers can turn you down flat, charge you much higher premiums, or offer coverage that excludes your pre-existing condition completely.
Some states require insurers to "guarantee issue" private plans to all comers, regardless of pre-existing conditions, though they might be costlier than regular plans and might be available only at certain times of the year or to certain types of applicants. Your state insurance department can supply details.
Most states have long maintained special high-risk health insurance pools to help those who can't secure individual coverage another way. But the high cost of premiums has deterred so many eligible people that the pools serve only a few hundred thousand people in the U.S.
Death and taxes. If you own a car, add car insurance to that list of unavoidables. And if there’s a teenage driver in your family, you’ll pay more—also unavoidable. The only thing you can avoid is paying too much. Here’s how.
Do an annual rate check
Check rates from other insurers annually to make sure you're getting the best deal. But if you've been with the same insurer a long time and benefit from discounts for longtime customers, it might be tough to beat its rates. To check whether your state insurance department provides rate comparisons, go to www.naic.org/state_web_map.htm to find a link to your state's department.
You can also compare multiple insurers online at Answer Financial, Insure.com, InsWeb, and NetQuote. Or consider forming a relationship with an independent agent, who will check rates for you at a range of carriers.
Pick a top-rated insurer
Saving on car insurance is not only a matter of finding the lowest premium. An insurer can charge less in premiums but cost you more overall by lowballing loss estimates, hassling the repair shop to cut corners, and forcing you to pay extra for the manufacturer's replacement parts if you choose them over cheaper knockoffs. It can also unfairly jack up your premiums after an accident.
To get the best service when you need it most, consult our most recent Car insurance buying guide (availability for some insurers is limited by region or policyholder eligibility rules).
Set the deductible right
A higher deductible reduces your premium because you pay more out of pocket when you have a claim. Hiking your deductible from $200 to $500 can cut your premium on collision by 15 to 30 percent. Go to $1,000 and you could save 40 percent. If you have a good driving record and haven't had an at-fault accident in years, if ever, opting for a higher deductible on collision might be a good bet.
Take advantage of discounts
Discounts are designed to attract the business of lower-risk drivers. Those drivers include students with good grades, new drivers who have taken a driver-training course, older drivers who have taken a refresher defensive-driving course, and members of affinity groups, such as college alumni and certain occupations and professions. Antitheft and safety equipment can also get you a discount.
Insurers also offer discounts if you buy your homeowners, renters, or life-insurance policy from them. But be sure you check out total costs both ways: premiums from different insurers combined, compared with single-insurer packages.
Be sure you review all of your coverage:
Liability. Your liability coverage pays for bodily injury and property damage that you cause in accidents. Buy standard 100/300/100 coverage, which pays for bodily injury up to $100,000 per person and $300,000 per accident, and property damage up to $100,000. If you have a high net worth, boost bodily injury to $250,000 per person and $500,000 per accident. Don't get caught short by keeping your liability limits at the state minimums. Buying more coverage might seem like an odd way to save, but the benefit comes if you have a costly claim, which can put your personal assets at risk.
Uninsured/underinsured motorist. One of every six drivers today may be uninsured, according to the Insurance Research Council. If you get hit by an uninsured at-fault driver, you'll have to pay for repairs out of your own pocket and sue the at-fault driver for damages. Protect yourself by buying uninsured/underinsured motorist protection with the same limits as your liability coverage.
Collision and comprehensive. Consider cancelling your collision coverage when the annual cost equals or exceeds 10 percent of your car's book value. (You can get free estimates of your car’s value on Edmunds.com and KBB.com.) Otherwise, you could end up paying more over time than you would recoup for repair or replacement of your damaged, stolen, or totaled vehicle. So evaluate your collision coverage annually. You’re generally required to maintain collision if you have an outstanding loan on your vehicle.
Weigh comprehensive coverage separately. Comprehensive covers you for theft, vandalism, and other non-collision damage, for example if a tree hits your vehicle. It also provides full glass coverage, in some cases with no deductible. It’s much cheaper than collision coverage.
Rental reimbursement. If you have another car that you can use while your vehicle is being repaired, you don't need to pay for rental-reimbursement coverage. Dump roadside assistance if you have an auto-club membership that's a better deal. Think carefully about optional personal-injury protection and medical-payments coverage: Forget it if you have good health coverage; keep it if you don't or if your usual passengers might not be well insured.
Insuring your teenage driver
Teenage drivers have higher accident rates, so adding a teenager to your policy can hike your costs by 50 to 100 percent. Immaturity and lack of driving experience help make motor-vehicle crashes the leading cause of death for U.S. teenagers.
Does your child need to have car insurance if they only have a learner’s permit? Yes. “If your teen is going to drive the car, they need to be on the policy,” says Insurance Information Institute chief economist Steven Weisbart. “Teens as a group are not good drivers,” he explains. “Not telling your insurance company that your teen has a learner’s permit is not a good start.”
You can also protect your child and cut your car insurance rates. First, make your child take a driving course before getting a license. Then make sure he or she complies with all laws and drives in a safe manner, with loss of driving privileges as the punishment for violations. Also, consider having your teenager wait until age 18 or 19 to get a license, instead of the usual 16 or younger in most states. Inform your insurer if the child isn't licensed or is away at college without a car. Finally, insist on good grades. Insurers may give a discount if your child has a “B” average at the time you add him or her to your policy.
There are some small savings in your child being on your policy. But letting your child have his own car and own insurance policy can also be a “good potential learning experience,” suggests Weisbart. Since each insurance company is different, a separate policy could give you some freedom to shop around, which could open up the possibility of some savings.
The safest bet: Compare the total costs both ways and opt for the better deal. “It’s in a parent’s and teen’s best interest to shop around. Find a company that’s more teen friendly,” Weisbart suggests. “It makes sense for consumers to explore what the companies are offering.”
Learn more about Distracted driving and teen safety.
Homeowners insurance—which protects you financially from theft and damage to your home and your belongings, as well as to people in your home if harm to them occurs (from a pet or a fall, for example)—is not as hotly price-competitive as auto insurance, but you can still save from hundreds to more than $1,000 a year in premiums by shopping around.
Residents of California, Florida, New Jersey, New York, Texas, and other states whose insurance departments publish rate comparisons for standardized coverage can zero in on the lowest-priced insurers and then contact them for custom quotes. You can also get prices from an independent agent who sells insurance from multiple carriers at iiaba.net (the website of the Independent Insurance Agents & Brokers of America), or on shopping sites like Insure.com, Insweb.com, and NetQuote.com. Buying homeowners and auto coverage from the same company can help you save as much as a 30 percent overall on premiums.
Don't cut your coverage just because home prices have collapsed in recent years. The home’s replacement value—the cost of labor and materials required to rebuild—may still be higher than the market price your home could fetch. In fact, home rebuilding costs rose 5 percent last year alone. Ask your insurer for a customized estimate of your home’s replacement value. Review your coverage every few years.
Liability protection for visitors injured in your home or for damage that you, your children, or your pets cause to others, is also standard in homeowners policies. Coverage usually starts low, at $100,000; increase it to at least $300,000. The more assets you own, the more advisable it is for you to buy an umbrella or excess-liability policy with coverage of $1 million or more.
Of course, all those add-ons increase your total premium, but you can offset part of the cost by raising your deductible to $1,000 or higher, which reduces the premium. In many states, you’ll be required to have a higher deductible for hail, windstorms and hurricanes. You should have sufficient savings to cover that deductible.
Learn more in our Homeowners insurance buying guide and Ratings.
How to insure your college student's stuff
College students take a lot valuable stuff with them to school: computers, printers, TVs, bicycles, cell phones, digital music players, and more.
The right type of coverage depends on your eligibility and preferences. Read your own homeowners policy carefully to find out exactly what is covered and the limits and deductibles that apply. If you need more coverage, ask whether it can be added to your policy at additional cost.
Take an inventory of possessions ahead of time to assess your needs (and in case your child needs to file a claim later). Try the What You Own Inventory free software, which lets you attach receipts and photos for each item in the inventory. Store copies of the inventory at home and at school, in case one gets lost or destroyed. When preparing an inventory for your home, create a section for items away at college.
Here are the main options.
Homeowners insurance. If your kid lives in a dorm or other college-owned property, her possessions at school typically are covered automatically against loss, theft, and damage under your homeowners, condominium, or renter's policies. Coverage often is limited to 10 percent of the policy's coverage for contents. So if your policy covers contents for $100,000, the limit for your student's stuff at school would be $10,000. If your child is studying abroad, check your policy to see if his or her stuff will be covered.
Renters insurance. If your child doesn't live in college-owned housing, your homeowners policy won't provide coverage. But your student can take out a renter’s insurance policy for about $15 to $30 a month. Like homeowners insurance, renters policies come in two basic forms: Actual cash-value policies cover the value of the item at the time of loss, taking depreciation into account; replacement-value policies cover the cost of replacing the lost item with a new one. Replacement-value policies cost more, though both types are subject to the coverage limits. As with homeowners policies, some items may require extra protection.
Your homeowners insurance agency may also provide a separate renters policy with the child and a parent as the insureds. It could be less expensive than a renters policy solely under the child’s name, and can have the added benefit of helping your child establish a payment record with the insurance company—allowing her to obtain less-costly auto insurance from the same company in the future.
Student policies. Some companies offer specialized property insurance for students, including CSI Insurance Agency (rated B by the Better Business Bureau) and National Student Services (rated A+ by the BBB). Both policies cover students whether they live in a dorm or an apartment in the U.S. or abroad. The companies offer deductibles of as low as $25, generally less than you'd get on a standard homeowners policy, and limits of more than $25,000. They both offer full replacement coverage. Policies are priced from less than $100 to several hundred dollars annually, depending on the deductible and type of coverage. National Student Services offers a lower-cost version of its policy that doesn't cover accidental breakage.
Like standard homeowners policies, neither of the student plans typically covers lost items, as opposed to those that are stolen or damaged in a fire, for example. But they both cover loss from a flood, earthquake, and other calamities. And because these are separate policies, there's no risk that filing a claim might cause your homeowners insurance rates to increase.