What's Your Policy On Insurance?

No one enjoys paying for insurance, but there's no question that good coverage can protect you and save your assets. However, that doesn't mean you need to buy insurance for everything.

When buying insurance of any kind, I advise people to keep these four rules in mind:

Cover only big risks: Buy insurance only to protect you against risks that would be financially devastating.

Don't over-insure: Buy the right type and right amount of coverage; never buy too much, and don't buy insurance for limited risks, such as a specific disease or to cover a single loan.

Cancel coverage you don't need: Buy insurance when you need it — and cancel it when you no longer need it.

Keep emotions out: Never make a decision to buy insurance solely for emotional reasons.

Health, auto, homeowners and life insurance are the basics. Few people will argue that these are important. They won't necessarily cover all of your insurance needs, but they are the standard starting point and four policies that I recommend for everyone, in the right dose, at the right price, at the right time. After you have the basics covered, here are some additional insurance policies to consider:

Renters' insurance: If you're not a homeowner, you won't have homeowners insurance. If this is your situation, then consider renters' insurance. Landlords' policies cover only damage to the physical structure, not your possessions inside the dwelling you rent. Renters insurance typically covers losses from fire, theft, vandalism, damage from electrical surges and faulty utilities and water/weather damage as well as liability coverage and medical payments coverage. These last two items will provide funds for legal defense and cover claims against you should someone get injured at your rented home. A good renters policy is really inexpensive — you can get a policy that provides $30,000 worth of coverage for about $180 a year.

Surprisingly, only a quarter of all renters have this protection. But even replacing items inside a bare-bones apartment can be quite costly, and you never know when problems may pop up. If your apartment or condominium becomes uninhabitable due to a fire, burst pipes, or any other reason covered by your policy, your insurance will cover your "additional living expenses" — generally, that means paying for you to live somewhere else.

Flood/natural disaster insurance: This makes sense if you live on a flood plain or in an area that is at risk exposure to violent storms such as hurricanes. FEMA makes this available through the National Flood Insurance Program to people in high-risk locations.

Disability insurance: Most people don't think about disability insurance until they need it. By then, it may be too late.

The risk of an unexpected disability between the ages of 25 and 65 is three times greater than the chances of death. This is also a very large financial risk because when you are disabled, you may not be able to earn an income but your living expenses will continue — or even increase.

Many employers offer short-term coverage, and about 40 percent of medium and large companies offer long-term disability.

If your company allows you to buy disability through payroll deduction, you should have the premiums deducted from your after-tax pay — doing this will ensure that any benefits paid will be paid tax-free. This way you can buy less coverage, because the benefits will be tax-free and you save money because you are not "over-doing it" on this coverage.

Remember, since most disability insurance provides very limited benefits after age 65, people nearing that age, or in retirement, should consider cancelling this coverage.

Here are some insurance policies that, in most situations, are unnecessary according to one or more of the four rules of insurance above:

Say no to: life insurance for children: Life insurance should cover only people with dependents, not the dependents themselves. Since you don't rely on your kids for income, you really wouldn't need financial help upon their death. Grandparents and others sometimes like to give such policies as baby gifts, but they are simply not worthwhile.

From a mortality perspective, children are highly unlikely to die prematurely, so, for most parents, the decision to buy insurance involves emotion, not logic. This type of insurance is highly profitable for the insurance companies and those who buy it are not likely to ever collect any benefits from it.

Say no to: mortgage life insurance: When people buy a new home or refinance an existing mortgage, offers for this type of insurance are sure to flood their mailboxes. Basically, the mortgage company or its affiliate offers to sell you an insurance policy designed to pay off your mortgage in case of your death. Of course having enough insurance to pay off your mortgage is one reason to have life insurance, but you're better off buying enough term life insurance to cover all of your needs, in one policy, at the lowest cost possible, instead of buying separate policies that are sold as add-ons such as this.

The one exception to this rule is that some of these mortgage life insurance products are "guaranteed issue," which means that the health standards you must prove to attain this coverage are set lower than typical insurance policies. So if you are in poor health and might not be able to get any life insurance otherwise, then this coverage may be worth considering.

Say no to: travel insurance: The number of people buying this insurance has jumped since before disasters like 9/11 and Hurricane Katrina, when about 10 percent of travelers bought travel insurance; now the percentage is closer to 30 percent. Travel insurance typically encompasses three main categories of coverage: trip cancellation/interruption insurance, personal effects coverage and emergency medical insurance.

The typical cost of trip cancellation insurance is five to seven percent of the price of the travel, so a $10,000 vacation would cost $500 to $700 to insure. Experts agree that when dealing with reputable travel agencies, consumers are likely to receive refunds on cancelled trips. Group tours and cruise lines will often offer their own cancellation waivers for a very low cost ($40 to $60). Just be aware that this doesn't cover the money you lose if the company itself goes out of business. Also, check the fine print on your credit cards — they often offer some travel cancellation coverage.

Also, personal effects coverage may be redundant — your homeowners coverage may already provide coverage for the loss of personal effects when traveling, less the deductible. Airlines are required to reimburse you for up to $3,000 for lost bags. Also, check your credit card — some provide additional lost baggage coverage, protection for car rental losses and even additional death benefits.

It is advisable to consider additional travel medical insurance to cover medical mishaps, particularly when engaging in certain activities such as skiing, rock climbing and scuba diving abroad. This is because if you need emergency medical attention and evacuation, these costs may not be covered by your existing insurance. First, check with your existing health insurance plan and ask what is covered. You should do this before any trip abroad. If your plan does not cover certain items, then this coverage may be a good idea — particularly if you intend to engage in high-risk activities. Travel medical insurance, which covers doctor bills overseas or a medical evacuation, can cost from $25 for a few days of coverage to annual policies for more than $2,000.

The bottom line: Although losing money is never fun, the chances of suffering a devastating financial loss because your vacation was cancelled is not likely — for this reason, trip cancellation insurance is not necessary. Instead, deal with a reputable travel agency and consider a cancellation waiver. Flight insurance in particular should be unnecessary of you have a the right amount if life insurance to begin with.

Say "I don't" to: wedding insurance: This insurance covers a variety of nuptial mishaps such as no-show photographers, photos that don't turn out, stolen wedding gifts, reception facilities destroyed by weather or closed by bankruptcy. There is even a policy that reimburses losses when the bride or groom gets cold feet.

Basically, if something happens, the insurance pays for lost deposits or even may pay to reschedule or even restage the wedding. The insurance was first offered in 1993 and although it's a big hit in the U.K., the coverage has been slow to catch on in America — less than 1 percent of the betrothed in the U.S. buy it. The coverage costs about one or two percent of the cost of a wedding — and with the average cost of a wedding over $30,000, expect to pay $300 to $600 or more.

But additional liability insurance is often required by reception facilities, and if not, I typically recommend this to protect the hosts from any injury or damage their guests may cause. But chances of a disrupted wedding causing an unrecoverable financial loss is fairly small, so it's not advised to buy any additional wedding insurance. You can manage your risk more cost-effectively by contracting only with reputable vendors.

Say no to: pet health insurance: The trend of "humanizing pets" seems to be the driver as more pet owners are purchasing this coverage. More pet owners are increasingly willing to spend larger amounts of money on the care and comfort of their pets. Reports indicate that about five percent of employers — including eBay, Office Depot and Hilton Hotels — are offering group pet insurance programs to their employees. The benefits include coverage for a pet's x-rays, surgeries, lab tests and routine treatments.

With the recent large-scale contamination of pet food causing illness and death to thousands of pets across the nation, more pet owners are considering this coverage. Pet owners can expect to shell out $10 to $30 a month for a basic plan that reimburses up to 80 percent of covered costs.

The industry's largest pet insurer reports that the number one claim costs an average of $88 each and Americans spend over $11.1 billion at the vet each year.

But this coverage violates the rule that you should not buy insurance for emotional reasons and only insure for big financial risks. A more cost-effective approach would be to budget for these additional expenses.