I have always carried insurance because of my answer to the question in this title: in general, I am not willing to take a lot of financial risk. I began to save for retirement almost as soon as I started my first full-time job in the fall of 2005. I rarely buy individual stocks and instead tend to stick to a diversified portfolio of investments through mutual funds. And besides that crazy time where we used up most of our emergency fund to pay off the last of our non-mortgage debt, there is always an emergency fund waiting in our savings account in case of an emergency.
Even though our vehicles are insured through car insurance and we both carry some life insurance from work, I have begun to wonder if the choices that we made with these types of insurance means we are a bit riskier than we thought after all. Let’s take a look at what I mean.
Both of our vehicles have car insurance (we have purchased a new used vehicle since our other one broke down this past summer). In fact, a minimum amount of car insurance is required by Texas state law. It is mandatory that we carry liability insurance to be able to pay for damage done to other vehicles, and the minimum all drivers must carry is $30,000 for each injured person, up to a total of $60,000 per accident, and $25,000 for property damage.
Aside from maintaining the minimum amount of insurance to be law-abiding citizens, the next thing we had to ask ourselves was how willing we were to replace our vehicles or pay for damage to them in the event of an accident, a tree limb, or the like. While our car insurance policies certainly cover more than the minimum, the policy on our new used vehicle only covers a bit more. We decided to not put collision or comprehensive insurance on the new used car. While the 2007 Mustang is worth it to have collision and comprehensive insurance because it is not something we would want to replace if we ever had to (and the replacement of it would possibly even force us to take out a car loan to do so, something we vowed never to do again), we paid under $3000 for our new used vehicle and could much more easily replace it if need be.
This extra “risk” we have put on ourselves—having to pay for any damage done to our vehicle and/or for its replacement in case of accident, tree limb, etc.—is saving us $60 per month at the moment.
My husband and I both carry life insurance through our work. This means for me, I only have $5,000 of coverage. Paul carries more than me, but only $25,000.
We have no children, and have paid off all of our non-mortgage debt. Since we live in Texas, our mortgage is very affordable. However, we are still taking a risk with not having a full life insurance policy. The risk is that the surviving spouse will not be able to go on living our current lifestyle because they will be down to one income. Of course this is inevitable when you lose your spouse for so many reasons other than financial.
The other risk we carry by not purchasing a policy at a young age is that the cost of doing so will increase with time. Right now at 28 and 31 a policy would be relatively cheap and we could lock in a rate for as long as we needed. As we get older, the policy lock-in rate will rise.
Even though there are risks to our insurance policies, the main reason why it is not actually as risky as it seems is because we have an emergency fund, investments, and have paid off our non-mortgage debt. In other words, we have created our own back up policy (albeit, a small one compared with actual insurance). Still, disaster can always strike, and while I am comfortable with our coverage amounts, I do have a healthy respect for the unknown.
How much car and life insurance do you carry? Do you feel this is sufficient?