Topic 09 of 20
Insurance basics: what to buy first and why
Insurance is the bill you pay hoping you never use it, which makes it easy to skip or overbuy. The rule of thumb is simple: insure against the losses you could not pay for yourself, and handle small ones from savings.
Insurance basics guides
Three words that explain every policy
- Premium: what you pay to keep the policy, monthly or yearly.
- Deductible: what you pay first when you have a claim.
- Limit: the most the policy will pay.
Everything else in a policy is a definition of what counts as covered and what does not. When you compare quotes, line up the same limits and deductibles; otherwise the cheaper quote may simply cover less.
What to buy first
- Health coverage. A single hospital stay can cost more than a year of rent. Coverage may come from an employer, a parent's plan until age 26, the Marketplace or Medicaid.
- Auto liability, if you drive. Most states require it, and it pays for damage and injuries you cause to others. State minimums can be low compared with the cost of a serious crash.
- Renters insurance. It is usually inexpensive and covers your belongings and your liability if, for example, your overflowing bathtub damages the apartment below. Your landlord's policy covers the building, not your things.
- Disability insurance, often through an employer, replaces part of your income if illness or injury stops you working. Your income is likely your most valuable asset.
- Life insurance, once someone depends on your income.
Choosing a deductible
Pick the highest deductible you could pay tomorrow from savings without borrowing. If your emergency fund is $1,000, a $2,500 deductible saves premium but leaves you exposed. As your savings grow, raising deductibles is one of the simplest ways to lower premiums.
Making a claim
Document everything: photos, receipts, police or incident reports. Report the claim promptly, keep a log of every call and ask for decisions in writing. If you disagree with an outcome, ask how to appeal, and know that your state insurance department handles consumer complaints.
Review your coverage once a year
Life changes faster than policies do. Once a year, and after any big change such as a move, a new car, a new job, a partner or a child, read the declarations page of each policy. Check that the address, drivers, vehicles and limits are right, that your deductibles still match your savings, and that you are not paying for coverage you no longer need, like collision on a very old car. Ask your insurer which discounts you qualify for; bundling, safe driving and security devices are common ones. Ten minutes a year can prevent both gaps and overspending.
Insurance setup checklist
Tick items as you go. Ticks stay on this page only and clear when you leave.
Questions people ask
What is a deductible?
The amount you pay toward a covered loss before the insurer pays the rest. A higher deductible usually lowers your premium but means you pay more when something happens.
Do I need life insurance in my twenties?
Usually only if someone depends on your income or would be left with your debts, such as a partner, children or a co-signed loan. If nobody relies on your income, other coverage usually comes first.
Will filing a small claim raise my premium?
It can. Insurers may consider your claims history when renewing or pricing a policy. For a loss only slightly above your deductible, compare the payout with the possible premium increase.