Don't Buy Too Much Insurance! - The Good

By Jessica Silver-Greenberg, Wall Street Journal, 8 October 2011

In this age of hurricanes, tsunamis, market crashes and banking crises, it isn't any wonder that people are feeling insecure. Companies are responding by rolling out a raft of newfangled insurance policies designed to protect against real—and perceived—risks.

In addition to health insurance, some other types of coverage are indispensable. Among them:

• Term life insurance. This type of life insurance—which provides a death benefit for a specific period, such as 10 to 20 years, with premiums generally set at a flat rate—is the best bet for most people, say independent insurance consultants. "Permanent life" insurance, by contrast, combines a death benefit with a savings account, and carries steep commissions. Unless you are using the policy to build tax-deferred savings, there are few real benefits.

• Disability insurance. It often is a good deal, say financial advisers, because it pays a portion of your salary, unlike other illness-related insurance that offers a lump sum.

Check whether the plan will cover just a percentage of your salary or will factor in payments based on total income, including commissions and bonuses. And look for a plan that will provide benefits if you can no longer perform your current job; some plans will prevent you from receiving benefits if you are still able to do a comparable job. Finally, check whether there are ceilings on payments for certain conditions, such as mental-health illnesses.

• Umbrella liability coverage. These policies help protect your assets from seizure if you are sued, and are well-suited for people who have accumulated assets, like a home, and work in professions vulnerable to lawsuits, such as medicine.

Basic policies cover only a portion of your total assets and often skimp on coverage for brokerage accounts, cars and retirement accounts. If you consolidate your insurance accounts by getting car and home insurance from a single insurance firm, you can save on premiums for umbrella liability coverage, too. But if you are renting, and don't own your home, you can skip the coverage.

• Earthquake and flood insurance. Most homeowner's policies don't cover earthquake and flood damage. If you live in an area prone to natural disasters, it is worth forking over extra to get protection.

The vast majority of flood-insurance policies are offered through the National Flood Insurance Program, which is administered by the Federal Emergency Management Agency. The insurance covers water damage to homes from events ranging from tsunamis to mudslides, and costs, on average, around $570 a year, though premiums are higher in high-risk zones. You can get more information at FloodSmart.gov.

Some property insurers sell earthquake insurance as an extra in a standard homeowner's policy or separately. Deductibles range from 2% to 20% of the insured value of the home.