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Is Insurance Necessary? Navigate the Possibilities

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Art Credit: Zitona

Talk about insurance seems to be everywhere, from the Affordable Care Act and health insurance debates to chatter after natural disasters and inclement weather. You may be asking: do I need insurance? What kinds of insurance are right for me?

I came to value insurance during a very personal—and scary—situation. Before I became a financial advisor, my wife and I made a point to sit down to update our insurance. We discussed life insurance and decided it was important that, should something tragic happen to one of us, the other would always be financially protected. It was difficult to place a dollar value on how much that protection was worth to us; no one wants to think about that, much less discuss tragedy, but it was important to us to be prepared for it. We also reviewed our health coverage to understand if it was adequate—little did we know how soon we’d discover just how adequate it was.

Ten days after our wedding, my wife landed in the emergency room with what we thought was a seasonal flu. It was soon determined to be pneumonia, a case so severe that within a few days, she needed life support. Her doctors put her on a breathing machine and into a drug-induced coma and prepared me for the worst. Here I was, a newlywed, watching my wife die before my eyes. During those long nights in the hospital, I was only focused on her. I didn’t have to worry about how we would afford those costly medical bills or how I would get by financially, should the worst truly happen. I knew our life and health insurance policies would cover the bills, and I also knew that my emergency savings would cover the co-pays and miscellaneous expenses such as my wife being out of work.

Within a few days, my wife turned a corner and was soon able to breathe on her own. She eventually made a full recovery, and this event—just one in a lifetime of turning points—convinced us that the unexpected could really happen at any time and it's necessary to be prepared for it financially.

Our love for each other allowed us to have some tough discussions and make some tough decisions on buying insurance to protect each other. That is ultimately what insurance does—it protects us and our loved ones. This is why I’m such an advocate for helping families be financially prepared.

Each one of us is subject to a variety of risks every day and we have to decide how we will deal with them. We can:

1. Ignore the possibility of something like getting sick or in an accident
2. Buy insurance to help us when something does happen like landing in the hospital
3. Start our own personal savings, to pay out of pocket in the event something does happen

For example, we may pay $1,000 each year for car insurance and never file a claim. But if an accident does happen, that premium becomes a great deal cheaper than paying for medical bills (for ourselves and/or others hurt in the accident), car repairs, and other related expenses. Sure, a car repair could cost as little as $500 to fix a bumper—or it could cost thousands of dollars to replace a totaled vehicle. Similarly, a family may pay $1,000/month or $12,000/year for medical insurance, which you may not use, but if you need a hospital stay like my wife’s, it could cost $40,000 to $50,000, much of which was covered on our plan.

Once you decide to get insurance, you have two options. Some insurance types, like health, life, or disability insurance, may be available both through your employer and insurance companies. Other types such as auto, home, and renters insurance are only available through insurance companies. Just because an insurance option is more expensive does not necessarily mean it provides the best coverage for you, so it’s important to take time to assess your current needs and what is most valuable to you.

To assess your current insurance needs, place yourself in a situation where something could go wrong, such as a sickness, early death, or disability, and walk through the associated money concerns.  For a sickness or disability, it could be lost income, hospital, doctor bills, time off of work for your spouse, extra daycare for your kids, medicine, etc. For death, your family is losing your income and most people would want their family to be able to live at the same standard of living as before their death. So it’s important to understand your family's annual expenses should they lose you.  You may want to pay off the mortgage or other debts, provide for the kids’ college tuition, pay for a burial, or give money to a charity.

If you’re young and single, don’t think that you’re exempt from needing insurance. It’s actually an opportunity to buy certain insurances at less expensive rates. Look particularly close at disability and life insurance. If you are severely injured on your next skiing trip or get sick and can’t perform the same work as before, how will you take care of yourself? If you aren’t eligible for life insurance at a later age, how will you protect your future family? If you’re young, you should be looking at the rest of your life, which is potentially quite a long time!

If all of this sounds overwhelming, professional advisors can coach you through how to think about planning for such events.

The bottom line is that we can use insurance to protect ourselves and our loved ones from some of the uncertainties in life. Insurance is a very personal decision, as everyone has different needs. While it is a cost, we need to consider how it can protect us financially, physically, and emotionally. For my wife and me, it gives us peace of mind knowing that we have insurance to protect our family from the real risks in this life.

*This column has no affiliation with any financial institution.