15 things you need to know about insurance

MSN Money
By Jeff Wuorio

Insurance is complicated and confusing. This guide answers some basic questions on where you need coverage and how much.

Winston Churchill once described the former Soviet Union as "a riddle wrapped in a mystery inside an enigma."

The same description might hold true about insurance in its varied forms. What you need, what you don't need and how much are confusing questions for many. Accordingly, here are 15 of the most commonly asked questions about insurance, along with some answers that should prove helpful to you in developing a comprehensive, cost-effective network of insurance coverage.

1. What sorts of insurance do most people need?
Basically, most people need to be concerned with insuring four areas: their possessions, their life, their health and their finances.

2. When you're talking about possessions, does that mean that homeowner's insurance is the most important?
Probably, since a house is likely to be the single biggest investment most of us make. The general rule of thumb with homeowner's insurance is not to skimp. If you can, pay a bit extra to obtain guaranteed replacement coverage, which mandates that the insurer will replace your home if it's destroyed regardless of how much it costs. If you only specify a certain amount of coverage, you could end up paying the difference if it doesn't meet all your replacement expenses.

3. Once I have guaranteed replacement coverage for my home, I'm all set, right?
Maybe, maybe not. It's important to know what your homeowner's insurance covers and what it doesn't. For example, particularly pricey items such as big-screen televisions and extra fancy stereo equipment are often excluded from policies or, at the least, inadequately covered. The same goes for antiques, collectibles, expensive jewelry and furs. To protect these and other items that your policy doesn't, obtain riders that specifically cover those things.

Additionally, homeowner's insurance does not cover flood damage. So, go to your local town or municipal office and see if your house is in a flood plain. If so, contact the federal government's National Flood Insurance system to get flood policies offered by private insurers. (A link to the Federal Emergency Management Association's National Flood Insurance Program is on the left.) Likewise, seek out earthquake insurance if you live in an area that might be hit by a quake.

4. I have a home office. Do I have any special insurance needs?
Oh yes. A great deal of home office equipment, such as computers, fax machines, copy machines and the like, are generally excluded from most conventional homeowner's policies. As such, you have to obtain separate insurance to cover them. Insurance becomes particularly important if you see clients in your home office. That means you likely need liability insurance as well, so check with your insurance agent to make certain all your bases are covered.

5. Does homeowner's insurance cover me if, say, someone slips on my front steps, breaks a leg and sues me?
Not completely. Homeowner's insurance policies (and, for that matter, renter's insurance) have liability limits, so it's a good idea to investigate an umbrella policy. This adds additional liability coverage, upwards of $1 million and even more for a relatively cheap price (although the prices vary considerably from state to state). Not only does it add extra liability coverage for where you live, but you also get additional liability coverage for your car.

6. Is car insurance an absolute must?
Absolutely. Every state requires that drivers have some sort of automobile insurance in place. Even if they didn't, it would be sheer madness to drive even one inch without some form of protection. Slam into someone else and wreck another car or kill someone, and your financial life could very well be ruined without the protection of auto insurance.

7. Why is auto insurance so expensive and how can I hold down the cost?
The biggest bite of auto insurance comes from liability protection, which is effectively divided into bodily injury protection and property protection. This is one element of auto insurance you shouldn't shortchange. Look for minimum coverage of at least $100,000 per person, another $100,000 for property and $300,000 per accident. Additionally, if you can swing it, add on uninsured motorist coverage, which protects you in the event you have an accident with a driver who has no insurance.

To make this more affordable, consider raising your deductibles (that portion of the expense you have to pay before your coverage kicks in). Pushing up deductibles to $500 or even higher can significantly cut your premiums. Another way to trim costs is to eliminate collision coverage, which covers damage to your car. That's probably not wise if your car is new, but give it some thought if your car's got a few years on it and driving around with a ding or two is no big deal.

Other ways to cut costs: Drive safely (drivers with good records get better deals); insure every car you own with the same company (multi-car packages often mean lesser premiums); don't smoke (statistics show smokers have more accidents than non-smokers); and, if you're still in school and pulling down good grades, let your insurer know it (good marks can often cut premiums).

8. What about life insurance? Do I have to have that?
Does anyone depend on you financially? In its most basic form, life insurance covers a person's income. So, if no one, such as a spouse, child, or parent, is depending on your income, then life insurance is optional. However, if you're married, or there is someone whose well-being depends on what you make for a living, life insurance can prove an essential form of protection.

There is one interesting wrinkle that goes against the maxim of no income, no insurance. If you work and your spouse stays home with your kids, give some thought to taking out insurance on your spouse. The idea here is, should your spouse die, the death benefit could cover the expense of child care, which can prove rather hefty.

9. How can I figure out how much life insurance I need?
It's something of an inexact science, but try MSN Money's Life Insurance Needs Estimator.

10. What sort of life insurance should I consider?
For the most part, term life insurance works the best for most people. It's the cheapest and most simple insurance you can get. You pay the premium and you're insured. It's particularly effective if you follow the time-honored wisdom of buying term and investing the difference, which is what you would have to pay to get some sort of cash value insurance, or "whole life." If things work out, by sticking with cheap term and maintaining a systematic investment program, chances are that one day you'll have a nice large cache of cash.

11. So you should never buy anything but term life insurance?
It's not quite that cut and dried, because there are some instances where cash value insurance works quite well. For one thing, if you doubt you'll be able to, in effect, "invest the difference," cash value programs are a form of forced savings. In fact, there are some tied to mutual funds that can offer reasonable rates of return. And, since life insurance death benefits are exempt from taxes, they can prove an effective estate strategy to pass assets along to your heirs. The downside to most cash value plans is that they're more expensive than term and you have to plan on holding onto them for a while so you're not hit with heavy "early surrender" charges.

12. Health insurance is probably something I can't do without, right?
Correct. Recent estimates hold that more than 40 million Americans lack health insurance. Make sure you’re not one of them. The good news is that most employers offer health insurance to employees, usually at fairly reasonable group rates. Most plans boil down to a choice of two options, known as managed care and fee-for-service. Managed care, which carries such monikers as HMOs, PPOs and the like, has relatively inexpensive forms of coverage. Doctor visits and other services can be dirt cheap for employees, often costing only a couple of dollars per visit. The downside is that you usually don't get a doctor of your choice, as programs specify certain physicians from which you may select. Moreover, managed-care programs are often infamous for making you wait days and even weeks to get in to see someone.

Fee-for-service, on the other hand, carries more expensive premiums than managed care. The major advantage is that you can generally go to any doctor you want. Generally, fee-for-service policies will pay 80% of patient expenses after deductibles, with you as the employee responsible for the remaining 20%. Like other forms of insurance, you can trim fee-for-service premiums somewhat by increasing your deductible.

If you're self-employed or, by chance, your employer doesn’t offer health coverage, make certain you get something in place.

13. What exactly is COBRA?
COBRA stands for the Consolidated Omnibus Budget Reconciliation Act of 1985. Under COBRA, if you resign from a job or are terminated for any reason other than "gross misconduct," you can continue under your former employer’s health-care coverage for up to 18 months. In many cases, spouses and dependent children are also COBRA-eligible. The downside is that the premiums are expensive since, in effect, you're paying both your and your former employer's share. The idea of COBRA is to continue a form of coverage until you arrange for some other sort of health insurance.

14. Does health insurance help if I'm sick or injured and laid up for awhile?
Partially. Health insurance only helps to pay your medical expenses. To keep income coming in if you can't work for a time, look into getting disability insurance. This is one of the more commonly overlooked types of insurance, and one that most working families really need. It pays you an income if you're incapable of generating your own income for any period of time. Some employers offer it, but in many cases, you'll have to look for it on your own. Look for policies whose waiting periods are no longer than 90 days. This is the time you have to wait until you start getting disability payments.

15. What about long-term care insurance? Is that something that should be considered?
Again, it depends. Long-term care insurance helps pay for nursing care and other like expenses when you get older. That's a good thing, no doubt about it. The drawback is that the premiums are expensive and become all the more so the older you get (By the time you're in your 70s, expect to pay several thousand dollars a year). One important consideration in long-term care insurance is whether you can genuinely afford the premiums without sacrificing your lifestyle; on top of that, think whether you can keep living the way you want if the premiums jump by 20% or 30%.

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