The stocks of insurance companies generally make excellent long-term investments but how do you go about navigating the world of insurance as the insuree?

As consumers we are inundated with offers to purchase insurance for our home, car, TV, kids, even our pets. Those offering insurance earn great margins on these sales (hence the reason to buy insurance stocks in general).

Why do we buy insurance? Fear

We buy insurance to protect against unforeseen disasters.

Insurance can be a great thing. Proper coverage can help me sleep at night and can allow the latitude to partake in risky pursuits such as walking your dog off-leash.

On the other hand insurance is expensive and we certainly have other choices for our money which can be more pleasurable or lucrative. I have developed my own Rules of Buying Insurance (more like guidelines as Captain Barbossa once said).

MANDATORY:
Depending where you live, mandatory insurance for your motorized vehicles is likely. Other situations may include can be mortgage insurance in Canada if less than a 25% down-payment is met. As a business owner, workers’ compensation and disability insurance may be required by law.

We always make sure our mandatory insurance is adequate and also as inexpensive as possible by shopping around for the best options.

MAJOR:
I view major insurance as optional but certainly the category that allows me to sleep well. Just think of a life-altering event that does not kill you and how that could impact you and your loved ones. Critical illness and serious disability are generally considered as major events. Your income and cash flow could be dramatically altered.

If your plasma screen dies in 2 years will this have a major impact upon your life? How about if your pet needs an operation. If this type of unforeseen occurances will dramatically impact your life than by all means buy insurance. Alternatively, an emergency fund in short term liquid investments this could act as insurance for minor events. Everyone is different with different thresholds.

I do not purchase insurance on the wants I buy .

I do not buy travel cancellation insurance except in very rare circumstances nor do I buy rental car insurance but make sure to pay for everything related to the rental car purchase with my Full coverage credit card. If you also do this I suggest taking a few minutes to see ow this credit card coverage really works and how you can inadvertently screw it up.

I use insurance to cover against events that could dramatically alter our life plan. As the sole income producer I have enough disability insurance to cover all expenses (plus a 20% buffer) if I could no longer work. In the US health insurance is not mandatory but a major illness could damage a family’s finances beyond repair. We always purchase travel insurance when travelling outside of the country. It can alleviate stress if illness strikes while away from home and if one shops around, quite inexpensive.

MORBID:
It has been said that there are worse outcomes than death and I agree. Insurance covering your death really does nothing for you. One buys life insurance for two primary reasons:

1) When premature death would lead to a major alteration in the life of your loved ones. My own life insurance expires when I am 56 and I will not continue with term insurance. It simply becomes far too expensive and I feel my money can be invested in far better places (see Insurance Companies). Also, this allows me to customize my financial goals around the elimination of life insurance.

2) As part of an estate planning formula. If you have been fortunate to acquire substantial assets which will be deemed as sold at fair market value upon your death than a big tax bill could be in the mail. Again, life insurance is certainly not for your own personal benefit unless it provides peace of mind while you are alive.

I have a term life insurance policy which would provide my wife with a decent income if only 4% of the money is withdrawn each year. She tends to be very conservative in investment flavor and I would want this capital invested in a secure and boring asset mix. I have calculated for an annual 4% draw which should preserve the principal for many years (many decades in fact). I allow for a 3.1% annual rate of inflation as this is the historic average.

I am currently exploring Univeral life insurance and the role it can play in both coverage after the age of 56 as well as estate planning. Upon first pass, it seems that Joint and Last to Die makes the most sense for our situation.

Everyone has different views on insurance, these are mine.

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