Finding out the hard way you were not properly insured
Eileen St. Pierre, The Everyday Financial Planner
Unfortunately, ignorance does not absolve you of your financial responsibilities. The IRS will tell you that if you are ever audited. Student loans have to be repaid even if you did not realize the implication of accepting the loans. Insurance is another area that confuses consumers. I recently had a client who thought he was properly insured, only to find out he wasn’t. His story prompted me to write this column.
What losses do you need to insure against?
It’s amazing that people will take out an extended warranty they will probably never use to replace the glass on their smartphones but they will purchase just the minimum amount of car insurance that fails to protect them if they cause an accident.
To determine what losses you need to insure against, consider these two variables:
- The probability of the loss
- The cost of the loss
It is probably more likely you will damage the glass on your phone than cause a car accident. But the car accident produces a much costlier loss. This is the loss you need to insure against, not breaking the glass on your phone. We refer to this as the severity of loss. You need to weigh the severity of loss much more than the probability of loss – many consumers fail to do this.
This is why financial advisors recommend insuring against high severity losses. For this reason, we suggest you have:
- Health insurance
- Life insurance if you have dependents or business partners
- Long-term disability insurance
- Renters/Homeowners insurance
- Personal liability insurance
- Auto insurance that will adequately cover your losses and medical bills regardless of who is at fault
All of these types of insurance compensate you for events that would cause extreme financial hardship – death or disability of a breadwinner, loss of shelter, fighting a lawsuit, and inability to earn an adequate living.
You can avoid high probability losses by altering your behavior.
If you break the glass on your phone a lot, invest in a proper covering or keep the darn thing in a secure place. The reason why companies get you to buy extended warranties is that the insurance coverage they are providing is relatively cheap and the odds of you actually submitting a claim are low. So you figure for a little more money a month, why not? If you do that with all your devices, electronics, and vehicles that money really starts to add up. Put that money towards insurance you actually need.
The bottom line is just take better care of your stuff!
Finding out you are not properly insured can be financially devastating.
Don’t just assume you are signed up for your employer’s health insurance. You need to fill out the proper forms. Make sure you know what is not covered. If you are not financially prepared to pay for something that is not covered out of your own pocket, then you need to purchase additional insurance.
Do you know what your auto policy covers? Minimum requirements can vary by state. When my husband and I moved to Oklahoma, we found out Uninsured Motorist Coverage would not cover medical bills we incurred if hit by an uninsured motorist (this was covered in Georgia). So we added Medical Payments Coverage (MPC). MPC will also pay our medical bills if we cause an accident. Don’t just assume your policy will always cover your medical bills.
My client caused a car accident. He had just the minimum required auto insurance and no health insurance. As a result, he is responsible for 100% of his medical bills. Did you know that if you need to be airlifted to the hospital, that bill alone can run from $50,000 to $100,000? Since hospitals subcontract this service to private companies, good luck negotiating that bill.
We can complain all we want about the cost of insurance but the alternative is a whole lot worse.