Insurance!

Disappointed partygoers might try to argue that I did not answer the investment question, but I would be ready with my follow up. There’s a lot of money, I would say, to be saved with insurance.

Getting the right insurance coverage is often the first investment that people should make, even before contributing to their 401(k) accounts or their kids’ education accounts. It’s imperative to protect the wealth and possessions you have before trying to create more.

Admittedly, buying insurance is not nearly as much fun as buying your first stock or bond. Thinking about all the bad things that can happen – such as death, disability, illness or car wrecks – is a pretty dismal exercise, compared to marveling about the magic of compound interest in your IRA, or finding the next Apple or Facebook stock. When you buy insurance, it can feel like making a bet – and paying good money to do so – that you hope to never win.

Yet it’s one bet you cannot afford to pass up. As long as you have anything of value that would create financial hardship to replace, you need insurance. This applies specifically to your home, car, and possessions.

There are also things that you don’t technically have yet, but have the potential to get, that still may need to be insured. This pertains to your future income, to the extent that this income will be necessary to the well-being of you or others. In other words, you may have nothing on a balance sheet, but still need life insurance and/or disability insurance.

Here are some simple rules for making the best investments in insurance.

  • DO focus primarily on losses that you could not afford to cover yourself. This is particularly important when the available dollars for insurance are limited. Before all else, buy insurance primarily to avoid loss.
  • DON’T use insurance just to avoid costs you’d simply rather not pay. This is particularly relevant to medical insurance or car insurance. No one likes paying for doctor visits or a dented fender. But if these costs would be bothersome rather than disastrous, don’t pay the higher premiums to cover them.
  • DON’T insure losses that are primarily emotional, rather than strictly financial. A grim example: the death of a child is devastating, but usually does not result in financial loss. Losing a partner is also wrenching, but not a reason to buy excess life insurance. Those personal items that are priceless only to you don’t belong in the riders to your homeowner’s policy.
  • DO think carefully about highly specialized insurances, such as repair coverage on appliances, or accidental death and dismemberment. The losses associated with these coverages are extremely low-probability events, which means that over time you’ll be paying more in premiums than you would if the event actually occurred.
  • DO think about your need for long-term care insurance. Many people assume that this insurance is primarily for protecting assets you want to leave to a spouse or your heirs. But long-term care insurance can also make sense for a single individual without a family as a way to ensure the quality and comprehensiveness of care, should it be needed.
  • Finally, DON’T neglect to consider your changing insurance needs. Be aware that insurance is not something you buy once and forget about. Your needs will change with life events circumstances, both positive and negative. You’ll need to review your policies at least annually to make sure you have the right types and amounts of insurance coverage for your situation.
  • Do keep the assessment of the coverages you require separate from the purchase. In other words, analyze first, well before you buy. The types of risks that are addressed by insurance can make us fearful and emotional, clouding our judgment. Make sure you are well informed about your buy decision, rather than allow yourself to be sold on a product you may not fully understand.

It may take longer than a quick conversation at a party to learn everything you need to know about insurance. My recommendation is to talk to a financial professional, such as a certified financial planner, about the kinds and amounts of insurance that make most sense for you. Whatever you do, don’t buy first and learn later. The more informed you are about how the insurance coverage works, the smarter your insurance investment will be.