Your Money - Insurance: Who needs it?

April 1, 2001
Most Americans aren't even close to being adequately insured.

Insurance certainly doesn't rank as one of life's most exciting purchases. Although it is just one part of your overall financial plan, it is a critical one that is often overlooked.

Insurance is designed to cover a financial loss due to death, disability, accident, disaster, or other catastrophic event. It's that simple.

Unfortunately, most Americans aren't even close to being adequately insured. For example, according to the American Council of Life Insurance, the average policy in force is about $41,450 - not nearly enough to cover future expenses and financial obligations that are faced in the event of a breadwinner's death.

The need for insurance is to help provide long-term security. But how much insurance do you need?

First, take a look at your needs. Following are some of the major types of insurance and how each might fit into your personal financial plan.

  • Health insurance - With millions of Americans uninsured, health insurance - or the lack of it - appropriately commands the most media attention. A prolonged hospital stay or medical emergency can be financially and emotionally devastating.

You may already have group health insurance through your employer. But if you must secure your own coverage, it pays to shop around. Premiums and coverage vary greatly, and some plans offer special benefits such as low-cost prescriptions and dental coverage. The key is to assess your needs first. For some, basic, "major medical" coverage is all that is needed. Remember, the most important aspect of any health insurance plan is to protect you against financial catastrophe in the event of a major accident or illness.

Life insurance - The key to selecting a life insurance product is to understand that your primary objective is having adequate coverage. Life insurance is designed primarily to protect against loss of income due to death. And, despite the many products and marketing terms used, life insurance policies basically are one of two types: term and cash value.

Term policies provide basic insurance coverage in the event of death. Cash-value-type policies, on the other hand, combine insurance coverage with an investment vehicle. As the cash-value policy accrues over a period of years, a percentage of your premiums becomes your money to spend or borrow against.

Both types of policies have advantages and disadvantages. Term products may provide the most coverage for the least amount of money, but their premiums may increase with age. Cash-value policies may provide an investment opportunity, along with steady or even decreasing premiums. But the monthly payments may be too high for the coverage you need, and other investment vehicles may provide better returns.

No product is designed to fit the needs of everyone. You must evaluate your short- and long-term needs for insurance. The most important issue is adequate coverage.

What is adequate coverage?

Everyone's needs are different. Financial professionals generally recommend insurance coverage of at least three to seven times your earnings. Some factors to take into account are your age, whether or not you have children, your income, your future income potential, and your financial obligations.

As a young worker, for example, you may need insurance to cover current income and future earnings. Over time, your savings and other assets - your net worth - most likely will grow. Life insurance buys you time. It helps ensure that, in the event of your death, your family can pay for the kids' college expenses and settle your debts. Again, needs are specific to the individual.

If you are a single worker, you may need insurance for a variety of reasons. You may have burial expenses, debts, business needs, medical expenses, charity interests, or other financial obligations to meet. By planning ahead, you can make sure that your loved ones aren't responsible for your debts.

  • Disability insurance - A disability can present the greatest threat to financial security by potentially increasing your costs, such as medical expenses, at the same time that you lose your ability to work and earn an income. That's why disability insurance is so important.

You may have long-term disability insurance through your employer. If not, most companies that offer life insurance also provide disability coverage. It's easy to secure a policy that meets your specific needs.

There are several types of disability insurance. Some provide a yearly income based on your salary, some provide lump sums, while others allow for projected increases in inflation. Regardless, the primary need is to provide adequate coverage for current, and possibly potential, income in the event you become unable to work.

  • Property insurance - Every homeowner and renter needs property insurance, and every car owner needs auto insurance. You also need liability insurance to protect you in the event of a lawsuit.

In fact, in most states, you can't legally drive without auto liability insurance. Property insurance usually provides you with some personal liability protection.

There's an insurance product for virtually every situation. The first step is assessing your own needs before selecting a specific product. The right decisions regarding insurance can help provide long-term financial security for you and your family.

FYI: Most people have insurance coverage on their homes, autos, etc., but many have not realized the value of their future earnings may far exceed the value of their tangible assets. If their future earnings cease because of an accident or illness, the loss of income could present serious financial problems. Social Security Administration studies indicate that, for people under age 65, the odds of a disability lasting for 90 days or more are much higher than the odds of dying.

Kathleen Adams, RDH, BS, is a financial adviser with Waddell and Reed ( She is currently trying to initiate money-management workshops for hygiene students and specializes in working with dental professionals. She can be reached at (800) 210-1357.