Now the leaders of the people dwelt at Jerusalem; the rest of the people cast lots to bring one out of ten to dwell in Jerusalem. -Nehemiah 11:1
I hate to consider myself a gambler, but I am. We all are. The atheist wouldn’t consider himself a person of faith, but he’d be wrong. We can’t even get out of bed in the morning without some measure of faith. Gambling requires faith because we can’t possibly know all the possible outcomes of—well, almost anything except drawing lots. And we all, consciously or unconsciously, assess the odds.
Hold onto that thought. It requires deep thinking, soul searching, going down to the marrow type thinking. I never really thought about this until I wrote my first inspirational manuscript. The heroine gives the hero a preposterous scenario which he ridicules. Her comeback question is, “What are the odds?” An offhand remark, but a turning point for the hero, because the question keeps echoing in his mind, and he finally has to access the odds on all those things he’s been avoiding.
What does this have to do with your budget? Actually everything in the budget has to be accessed, but nothing more than insurance.
Do You Need It?
If the loss will put you in dire straits, yes. The loss of life, auto or home can certainly put you or your family in dire straits. Healthcare is not true insurance but necessary. That subject was covered in my posts, Is Healthcare Really Affordable and What’s the Best Fit for Your Healthcare Budget, both in the January archives.
How Much is Enough?
When we’re accessing our need for insurance, this is the tricky part. If you over-insure you’re wasting money. If you don’t have enough and the unthinkable happens… This is where you have to access the odds for each situation.
I, and a lot of much smarter money managers, believe no one should take out whole life insurance. It’s not a wise investment, nor should insurance be used as an investment. Term insurance is the way to go. The only purpose of life insurance is to provide for your family in the event of your death. It’s only needed if people depend on your income. Obviously this includes your spouse and minor children. It does not include grown children unless they depend on your income. If you want to provide an inheritance, it should come from your estate, not insurance.
If no one depends on your income, the amount of life insurance you need shouldn’t exceed debts and final arrangements.
You’ll have to carry enough auto insurance to meet the requirements of the loan company if you’ve financed your vehicle, and states may require liability insurance. Take the highest deductible allowed. This can make a big difference in payments. I wouldn’t carry collusion and comprehensive insurance on a car over seven years old. You should have enough in your emergency fund to replace the vehicle. The odds are not great enough to justify the cost of such insurance. Your policy should cover liability and uninsured motorist, even if your state doesn’t require it. Court costs can wipe you out. One other thing to consider—pay in six months or yearly increments, not monthly. The insurance company will tack on interest charges that can be significant.
Again, the amount of insurance will depend on the mortgage company for the life of your loan. Also be aware you may have to pay mortgage insurance if your loan exceeds 80% of the principal. When the loan balance drops below 80%, drop the mortgage insurance. The company may not notify you, so be aware.
How much insurance should you carry if you own your home outright? No more than fair market value. This fluctuates, so make an assessment yearly. When the real estate market crashed, house values fell drastically. Guess what? The insurance companies probably didn’t adjust your insurance. You may be carrying too much for today’s market.
Should you carry renter’s insurance if you rent? From what I can tell, the insurance is fairly low, so yes, especially if you don’t have enough liquid funds to replace the contents of your home.
If you were drawing lots, the odds would be obvious. Not so when assessing insurance needs, but consider the odds we must.
Are you carrying too much insurance, or not enough?