Keeping it all Covered: Insurance

Comparing term and whole life insurance

Choosing the type of life insurance that’s best for you depends a lot on your personal needs. Knowing why you’re buying a life insurance policy can help you decide which kind of policy to purchase.

Basically, life insurance comes in two varieties: term life and whole life. Determining whether you want one type or the other or a combination of both is your first step.

Term life policies cover you for a certain number of years (the term) and pay a death benefit if you pass away during the policy’s term. Term life insurance doesn’t build cash value. If you outlive the term of the insurance, the policy lapses and no benefit is paid. Generally, term life insurance costs less than permanent life, although premiums may increase over time. If your main reason for buying life insurance is to ensure your family’s financial wellbeing for a finite number of years—until your children are out of college for example—term life may be a good option.

There are several types of term life insurance. Annual renewable term is a one-year policy with a premium set for your age at that time. Level premium term has a death benefit and premium cost that remain the same and can be purchased in five-, 10-, 15-, 20-, 25-, 30- or 35-year terms. Mortgage life insurance is a type of term insurance featuring level premiums with the death benefit declining over time. The idea is to mirror the policy owner’s mortgage value to pay the balance should the owner pass away.

Along with providing a death benefit, whole life insurance builds cash value. A whole life policy typically costs more than term life. The insurance company invests the premiums you pay and generates dividends that become part of the cash value. You can borrow against the cash value of your policy. Should you pass away before repaying the loan on an in-force whole life policy, the balance is subtracted from the benefit that is paid out. 

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Disability insurance coverage

Many people suffer a disability in their prime working years that could last for more than 90 days. If it happened to you, would you have a financial cushion or an emergency savings fund to see you through? If the answer is no, you should consider disability insurance.

Start by finding out if you have coverage through work. This is often the easiest and cheapest way to get disability insurance. Your employer may provide group short-term and/or long-term disability insurance that replaces a portion of your income if you’re ill or injured and unable to work. Typically, an employer’s plan will replace up to 60% of your salary, but check with your employer to learn about your policy. Plans may have a benefit cap, limit how long you can receive benefits and have a narrow definition of “disability.” So, take the time to learn about the benefits of your policy.

Even if you have coverage through your employer’s group disability policy, you may want to supplement it with an individual policy. Know how much short-term and long-term disability insurance you have and what the terms are before you buy an individual policy. Then use that information to determine how much additional coverage you think you’ll need. 

Know the features of your policy. When you are looking at your coverage options, pay attention to the way disability is defined in the policy. For example, when you purchase “own occupation” coverage, you’ll generally receive benefits if you can’t perform the major duties of your own occupation, as opposed to receiving benefits only if you are unable to perform any job. As a cost-cutting measure, you might consider extending the elimination or waiting period before you would start receiving benefits. You might also consider supplementing your policy to include coverage until retirement age and to cover cost-of-living adjustments, if available.

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How to buy insurance

Buying any kind of insurance can be confusing. There are so many types of insurance that most of us should have, including health, home or renters, auto, life and disability. No matter what kind of insurance you may need to buy, you should consider several things.

First, do a little research. Make sure the company you buy from is reputable. An Internet search will help you determine the company’s “AM Best Rating.” Just like when you were in school, a rating of A++ is best. Companies with ratings from B+ to A++ are considered secure and financially stable companies that are good choices.

Customer ratings will tell you a lot too. A highly secure and financially stable company is great, but if the service is poor you won’t be happy. Talk to friends and ask how they would rate their provider. A great way to find out more ratings is JD Power’s consumer reports.

Premiums are also important. Not all premiums are locked in. If they’re not, find out how often and how much they could go up. If the premium is guaranteed, make sure you get it in writing. And don’t forget to shop around. Each company has its own criteria for setting premiums so you might get a better price for the same coverage with another company.

Find out if the policy is “guaranteed renewable.” This means that the insurance company can never cancel your policy for any reason as long as you continue to pay your premiums on time. Just be careful because guaranteed renewable policies typically offer premiums that increase over time unless the policy specifically states that it is “non-cancellable” and “guaranteed renewable.”

Know what deductible options are available. The higher your deductible, the lower your premium. Just be sure you choose a deductible that you can afford and be sure to have that much saved in an emergency fund.

Read the fine print. With insurance policies you own or policies you are researching to buy, learn as much as you can. Ask a lot of questions and verify answers by going over policies with an agent. As confusing and tedious as it can be to understand insurance, it is not something you purchase frequently, so take the same care in buying as you would with an investment.

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Reducing your insurance premiums

If your insurance premiums seem high, you may be able to lower them. Review your policies every year and do some shopping because prices can change from year to year.

Check your deductibles to sure they’re right for you. You may consider paying higher out-of-pocket costs instead of carrying lower deductibles with higher premiums. Insurance companies usually reduce the premiums if you’re willing to assume more risk. But be careful. If disaster strikes and you don’t have the money available to cover the higher deductible, you’ll be sorry. So keep that emergency fund handy.

Improvements to your home can mean better rates on homeowners insurance. Check with your insurance provider to see if improvements such as installing an alarm or sprinkler system will reduce your premiums. You may have made these improvements for convenience, but never thought to mention it to your agent.

For older cars, you might consider dropping collision insurance. Often certain insurance costs don’t make sense once your vehicle has significantly depreciated because the replacement costs may be less than or equal to the cost of repair.

Also ask your agent about available discounts. Some companies give discounts on homeowner’s premiums if you live near a fire station. If you pay auto insurance for dependents, ask about student discounts or discounts for excellent grades. Don’t forget to ask if there are discounts available for airbags or other safety features too.

Keep your insurance agent up-to-date. Don’t just call when you’ve bought a new car.  Inform him of any status changes such as dropping points from your driver’s license, the ages of your children or if they will no longer be driving your vehicles.

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Upgrade your auto insurance

Liability coverage is the most important part of your auto insurance and is required by law in most states, including North Carolina. Your policy covers two kinds of liability, bodily injury and property damage. Together they protect you from what could be huge damages and legal fees if you are responsible for a serious accident. They also cover you if you are wrongly accused of being responsible. Your liability coverage protects you in any automobile you drive, in addition to protecting you and anyone allowed to drive your car.

In North Carolina, the minimum liability coverage is $30,000 per person, $60,000 per accident and $25,000 in property damage. If it is determined that you are responsible for an accident involving multiple cars or people, the legally required minimum isn’t going to go very far, and once it’s gone, expensive civil judgments may arise. Consider limiting your risk by increasing your coverage to $100,000 per person, up to $300,000 per person, and at least $50,000 property damage.

Raising your coverage limits will cost more, so be sure to get quotes from several different insurance companies to ensure you get the best rate. If you own a home, most insurance companies offer discounts for buying auto and homeowners insurance together.

If you are financing or leasing your vehicle, most lenders will require you to maintain comprehensive and collision coverage. Although not required by law, comprehensive and collision insurance cover you and your vehicle in the event of an accident.

Comprehensive and collision usually have a deductible that you will have to pay out-of-pocket. A good way to manage the higher cost of increased coverage limits is to raise your deductibles to a higher but still manageable number.

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What to know about home insurance

Owning a home is likely the biggest investment you will ever make. If you take homeowners insurance for granted, don’t!

Learn how your deductible works.

Your insurance company may offer a deductible that is a percentage of the insured value of your home. Some people confuse this for a percentage of the cost of fixing or replacing property when you have a claim. Not so. If your deductible is four percent and your home is insured for $100,000, you pay for the first $4,000 of damages. Also, some insurance companies offer policies with split deductibles, which means they may offer a property theft deductible of $250 but a much larger percentage of insured value for damage to structures.

Consider coverage for sewers and drains.

Your policy will have a definition of “water” to describe water damages that are covered. Unless your policy comes with coverage for damages due to sewer and drain backup, you should consider adding this feature to your policy.

Insure for unusual hazards.

If you live in an area affected by high winds, storms, or even earthquakes, you should think about adding coverage to cover such hazards. Read your policy carefully and speak with your insurance agent if you have questions.

Make sure your Replacement Cost Dwelling Coverage is right.

If your coverage isn’t adequate for the actual replacement of your home if disaster strikes, it’s possible you’d have to pay out-of-pocket for the difference between what your insurance covers and what it costs to completely replace your home. The coverage amounts recommended by your agent may or may not be accurate. Use your appraisal to find an appropriate value and make sure your home is insured for that amount. You can also compute a value by finding the average square foot price for homes in your area and multiplying by the size of your home. Don’t leave this to chance.

Ensure Fair Market Value on claims.

Create a written record of your valuables. You might want to consider videotaping or photographing valuables as they appear in your home. If you own collectibles, obtain professional appraisals. All these records of your property should be stored in a safe deposit box or other secure location.

Combine your home and auto insurance.

Talk to your agent about insuring both your home and your automobile(s). You will qualify for discounts, allowing you to save the money or apply it toward additional liability coverage.

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