Much of what you've been told about insurance is flat wrong. And common misconceptions and half-truths about insurance can cost you serious money. It's not your fault. Confusing jargon and the emotional baggage so often attached to insurance (no extra charge!) make this key financial topic rife with confusion. Here are seven common insurance myths and how you should really protect your family and possessions:
1. My Job's Disability Insurance Will Cover Me
You may believe that after an accident or illness your lost income will be covered through your employer's long-term disability insurance plan. Nope. "A typical group policy pays 60 percent of your salary up to a specified limit, such as $5,000 per month," says Brian Ashe, past chairman of the Life and Health Insurance Foundation for Education. What's more, group policies usually don't replace commissions or bonuses. Getting disability insurance right is essential since you have a one-in-three chance of becoming disabled and not being able to work for 90 days or more at some point in your career. And, not to be morbid, but becoming disabled is much more expensive for you than dying.
What to Do: Calculate how much you'd need to maintain your standard of living if you become disabled at Lifehappens.org. Then, if you're underinsured, see if your employer will let you buy supplemental coverage. Or look into buying an individual plan, which may pay up to 70 to 80 percent of your salary. Unlike group policies, the amount you get from individual plans usually is not reduced by other benefits, such as Social Security payments. Plus, if you purchase your own policy, disability benefits are not usually taxed (as they are if your employer pays for coverage).
Before you buy disability coverage, read the coverage explanation closely; some plans pay only if you can't work at all, while others kick in if you can't do your current job. The price varies depending on factors such as your occupation, income, waiting periods for benefits to begin, and optional features like cost-of-living adjustments. But a 45-year-old male accountant making $100,000 might pay between about $1,700 and $2,700 a year for coverage and receive benefits of up to about $5,000 a month. A 45-year-old female doctor with the same income and benefits could pay between about $3,000 and $4,600 a year, according to a survey of several large insurance carriers. (The female doctor pays much more because of her occupation and because women tend to live longer than men.)
2. My Homeowners Policy Will Cover Me
Maybe water in your basement or the engagement ring you lost is covered; maybe not. "Unfortunately, many consumers make a lot of assumptions about what's covered under a standard homeowners policy," says Kim Holland, Oklahoma insurance commissioner. "But you usually need additional riders for losses from events such as sewage backup, food spoilage from power outages, earthquakes, and wind damage."
What to Do: Review your policy when the renewal comes in the mail each year, especially the exclusions and limitations pages highlighting what's not covered. Even if your policy covers jewelry or collectibles, you may be limited to $1,500 total per claim - probably much less than adequate for the jewelry and art in your home. You'll need a separate rider to boost coverage for these items. Also, many policies won't cover things like a ring falling down the drain, so you may need a rider to protect against losses other than theft.
3. I Don't Need Long-Term-Care Insurance
You're reasonably healthy and figure long-term care is something only the elderly and infirm should consider. "But no one is immune to the effects of aging," says Brad W. Stark, CFP, of Mission Wealth Management in Santa Barbara, Calif. "Many people also mistakenly believe the government will help them if they need long-term care. But Medicare provides only short-term care after hospitalization." And Medicaid covers only the impoverished. An LTC policy can be a godsend, if needed, since a semiprivate room in a nursing home costs around $70,000 a year and assisted living runs more than $36,000 annually, on average, according to a recent MetLife survey.
What to Do: Look into long-term-care coverage in your 50s or early 60s; just watch out for the four biggest dangers of buying a policy. The price of a policy can vary enormously, depending on your health and the coverage you want. Someone between 55 and 64 might pay between $844 and $7,400 annually. Given the expense of these policies - not to mention the headaches if yours should prove inadequate when you need it - it might be cost effective to work with a fee-only financial adviser to help choose the right policy and a financially sound insurer.
4. Only Zillionaires and Glitterati Need Umbrella Coverage
This liability coverage shields your assets from lawsuit amounts exceeding your homeowners and auto insurance limits. For example, you're in a car accident and there's a settlement against you for $750,000, but your standard liability coverage is $300,000. "Umbrella policies are an added layer of protection in today's era of lawsuits," says Jim Barnash, CFP, of Stride Consulting in Chicago.
What to Do: Get an umbrella-coverage rider to your homeowners policy that's at least equal to your net worth. It's a pretty cheap way to buy peace of mind, especially if you own an expensive home or a business. Policies typically run just a few hundred dollars per million in coverage.
5. Low Deductibles are Best for Home and Auto Policies
Keeping your out-of-pocket costs low if you need to make a claim may sound like a good idea, but it's really not. For one thing, the lower the deductible, the higher the premiums. For another, "making a series of small claims may work against you in the long run if you're costing the insurance company more than you're paying in premiums," says Vickie Bajtelsmit, chair of the Department of Finance and Real Estate at Colorado State University. "Claims definitely increase the chance of your premiums increasing."
What to Do: Tell your agent to increase your deductible, and while you're at it, ask if you're eligible for a claim-free discount. Raising your deductible from $250 to $1,000 could save as much as 25 percent on your premiums.
6. I Need Enough Life Insurance to Cover Several Times My Income
Although the average amount of life insurance owned by policyholders is three times their income, if you have kids under 18, you'll probably need far more to keep your family afloat if you die. And if you have neither dependents nor a spouse who relies on your salary, you may not need life insurance at all.
What to Do: While calculators at sites such as Bankrate.com or Lifehappens.org give a basic idea of how much coverage you'll need, discuss your circumstances with a financial planner. And don't blithely assume your employer's life-insurance benefits will provide enough protection. You could change jobs, lose your job, or lose coverage if your company drops life insurance as a benefit. In any event, if you have children, you probably need a bigger policy than your company provides.
7. My Auto Policy Pays for a Rental Car After an Accident
Not necessarily. Rental reimbursement isn't included on all auto policies. And if you mistakenly think yours does, you could be severely inconvenienced if your car needs repairs after a crash. "The average car is in the shop for two weeks after an accident," says Loretta Worters, vice president of the Insurance Information Institute. "It can easily cost $500 or more to rent a replacement car for that time period." Also, if your car needs to be towed to a garage after an accident, your policy may not cover that either.
What to Do: Consider adding rental reimbursement and towing coverage, which may also pay for a flat-tire change, locksmith service, or battery jump-start. These inexpensive options usually run just a few dollars per month.
More on MoneyWatch:
• 4 Rules to be Smart About Life Insurance
• Video: Make Sure Your Life Insurance Is Safe
• Video: When Health Insurance Isn't Enough
• Health Insurance for the Self-Employed
• Rating AARP's Auto and Homeowners
By Arricca SanSone