The Retirement Corporation of America

Shopping For The Best Coverage

YOU NEVER KNOW what life may throw at you—from fire and flood to auto accidents to disabling injuries. You buy insurance to help soften the blows:

Life insurance to protect your heirs from the permanent loss of your income due to your death.

Disability insurance to protect your family from the short-term or long-term loss of your income due to some disabling injury or ailment.

Health insurance to cover the high and rising cost of health care.

Homeowner's insurance to protect your dwelling and your possessions from fire or theft.

Auto insurance to protect you from loss due to misadventures with your car.

Liability insurance to protect you against costly judgments arising from a lawsuit.

No one leads so charmed a life they won't experience some insurable loss during a lifetime—from a fender-bender auto accident to the medical cost of an injury to the loss of possessions from fire or theft.

That's not all of it, either. Beyond being a necessity, insurance can also help you reach some of your life goals. For instance, life insurance can also be a form of investment—letting you build up savings to pay college bills, helping to support you in retirement or boosting the value of your estate.

Finally, there are these tax advantages of insurance to consider:

•  Your beneficiaries don't pay income taxes on the proceeds and interest from a life insurance policy when you die, but this money does get included in your estate. So, your heirs could have to pay estate taxes on it.

•  A portion of the premiums you pay for whole life insurance (sometimes called cash-value insurance because it lets you build up some savings) grows tax-deferred. This is because the extra money you pay into a whole-life policy in the early years—beyond what it takes to cover your risk of dying and to pay sales commissions—goes into a cash account. You don't pay taxes on the interest you earn on the money in your cash account unless you withdraw it.

•  Death benefits paid by accident and health insurance policies go to your beneficiaries tax-free.

•  If you're self-employed, you may be able to write off up to 70% of the health insurance premiums you pay for yourself, your spouse and your children. The deduction is scheduled to rise to 100% in 2003.

Okay, now it's clear to you if it wasn't already, that you should have at least the six major types of insurance: life, disability, health, homeowners, auto and liability. Let's get on to helping you become a smart insurance consumer.

The Five Biggest Mistakes

What are the five biggest mistakes people most often make when they buy insurance?

1. Not buying the right kind of coverage.
2. Not buying the proper amount of coverage.
3. Not shopping around for the best deal.
4. Not looking into group policies first.
5. Not taking inflation into account in figuring how much coverage to buy.

The best approach is to buy only the insurance you need to protect you against financial disasters like a catastrophic illness, a major car accident, losing your house to fire and big lawsuits. As for the rest—minor fender-bender accidents and the minor health problems of life—self-insure. Pay the small bills out of your own pocket. That will reduce your premiums allowing you to buy more coverage for the money. There could be some money left over, not spent on premiums, to be invested in your future. This lesson will help you decide what must be insured and what you can cover out of your own pocket.

What Are Your Risks?

You can't buy insurance wisely until you take a cold, hard look at all the risks you have in your life.

There are some risks we all face, like getting sick and being unable to work for a long period. Then there's the possibility of dying before our children are grown and can support themselves, or of leaving a spouse or partner behind when we die without enough money to live on.

Those are personal risks. You cover them with health insurance, disability and life insurance. How much of this kind of coverage do you have between what you get from your employer and what you've bought on your own? Is it enough? We'll help you answer that question later. You're just getting started.

Whether you own a house or rent, you also have the risk of property damage. Homeowner's insurance also includes liability coverage in case somebody gets hurt on your property. In most states, you're also legally required to have liability insurance to drive a car.

But what if you don't have enough liability coverage through your home and auto insurance to resolve a lawsuit? Many people don't. That's why you may also need a personal liability umbrella policy which provides an extra layer of protection. You, furthermore, may want to buy long-term care insurance to pay nursing home bills for you and your spouse or partner when you get old. The best buys come when you buy it young.

If You Live in a Disaster Zone

Depending on where you hang your hat, you may have even more risks to consider. Hurricanes, floods and earthquakes often devastate many parts of the country. Standard homeowner's insurance doesn't cover these kinds of catastrophic events. You have to buy separate policies that are usually very expensive.

To some extent, a variety of federal programs like those of the Federal Emergency Management Agency (FEMA) offer some protection. Most states have programs of their own. And many have required insurance companies to band together to offer coverage from a high-risk insurance pool—the insurer of last resort.

Getting Started

Call several agents in your area to see what products their companies offer and to get any information about prices you can. Get recommendations for insurance agents from friends, relatives and coworkers. Check out the giants—Allstate, State Farm, Prudential, Metropolitan Life and New York Life.

Insurers are listed in the yellow pages. If you don't want an agent to visit you, say so—firmly. You're simply gathering information at this stage. Just ask the agent to send you literature on the kinds of policies that interest you. Then note which ones you want to learn more about later.

Don't ignore the direct sellers. GEICO (800-861-8380) would be one. USAA Life (800-531-8000) sells homeowners and auto insurance only to military personnel—active duty and retired. But life insurance is available to anyone. The Internet is rich in insurance-related sites. Ask any of the search engines or directories about "insurance" and you'll find more useful sites than you could make use of in a lifetime.

What You Should Know About an Insurer

You want to know the company or companies you're buying from are reputable, will deal with you fairly if you have to file a claim and will be around a long time.

Here's where to find out:

•  What kind of reputation does the company have?

Call your state's insurance department to see if any complaints have been lodged against th company. The department is usually located in your state capital.

Insurance topics are a staple of personal finance magazines like Money, Smart Money, Kiplinger's and Consumer Reports. From time to time, they compare the array of insurance products on the market and the level of service different companies offer. at offers lots of insurance information, including safety ratings of companies as done by Standard & Poor's Corporation, the credit rating company. Finally, talk to friends and neighbors about what kind of personal experiences they've had with insurance companies in your area.

•  What's the company's safety rating?

A carrier's safety rating tells you how financially sound it is. Several firms rate insurers, of which A.M. Best Company is the most well-known. You can get A.M. Best's ratings at most local libraries or by simply asking an insurer or one of its agents. They range from A++ for insurers A.M. Best considers financially strongest down to F for companies that are insolvent.