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Insurance

Nobody loves thinking about insurance, but it's a vital part of your financial plan.Most personal finances topics are anything but sexy, but insurance is the geeky, pimple-faced guy who – if approached by a supermodel at a party – would talk about actuarial tables all night. (No offense to my friends in the insurance industry!)

Nobody likes to think about insurance. You have to carry some kinds of insurance and you should have most other kinds, but it sucks to spend money on insurance. You hope you’ll never need it, so when you buy insurance it feels like you’re throwing thousands of hard-earned dollars down the drain. But if you ever do need insurance, you’ll either be glad you bought it or wishing you had bought it.

There are two kinds of insurance everybody should have: Auto insurance and health insurance. Car insurance is required in most states. And going without health insurance is a huge risk. Because even if you’re young and healthy, a freak accident could leave you with tens of thousands of dollars in medical bills that could totally derail your financial future.

If you own a home, you’ll have to carry home owners insurance. But if you’re a renter, you might want to consider renter’s insurance – a fairly cheap way to protect your belongings from theft or fire.

In most cases you don’t need life insurance before you start a family, but as soon as you have dependents, you’ll want to get a term life insurance policy that can replace your income for your family if you die during your working years.

The questions about when to buy insurance, how to buy it, and how much you need differ dramatically by the kind of insurance (home, renter’s, car, life, or health), and where you are in life (your age, how much you have in assets, where you live), but some pointers apply to all kinds of insurance:

Always shop around for insurance. Don’t let a smooth-talking salesperson talk you into one policy before comparing your options. Premiums and coverage levels vary dramatically among insurers, and you don’t want to overpay.

Understand your coverage. Different policies cover different things. Learn to ask questions when you shop for insurance, like “if my car is totaled how do you calculate the replacement value?” Or “Are there any circumstances in which this life insurance policy would not pay out a death benefit?” Health insurance is especially convoluted. Take a minute to brush up on how factors like your premium, deductible, and coinsurance will impact your policy.

Be wary of insurance you don’t need. Some examples include policies that will pay off your credit card balance or mortgage if you die or cash-value life insurance policies. Other kinds of insurance should be purchased with caution on a case by case basis. Examples include supplemental disability insurance and GAP insurance that will cover the difference between a car insurance payout and any remaining balance on your auto loan.

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