How Much Insurance Do You Need?

Insurance is designed to protect you from life’s unexpected events, but the amount of insurance you carry can make a big difference in how well you’re equipped to handle, and recover from, unfortunate events. Here are some handy guidelines to help you determine how much insurance you need.

Car insurance

Connecticut (and almost every other state) requires that drivers have a car insurance policy in effect with minimum coverage requirements, but after that it’s up to you how much insurance you have.

Connecticut requires:

  • $20,000 per person/$40,000 per accident in bodily injury liability (which covers the medical expenses of people involved in an accident that is your fault)
  • $10,000 in property damage liability (which covers damage to the other car involved in an accident that is your fault)
  • $20,000 per person/$40,000 per accident in uninsured motorist (which covers costs if you are hit with someone with no insurance

Although these are the state minimum requirements, we strongly advise that you consider liability limits of at least $100,000 per person/$300,000 per accident and $100,000 in property damage. In addition, $100,000/$300,000 for uninsured motorist coverage.

Insurance for medical payments, collision (which covers repairs to your car after an accident) and comprehensive (which covers loss or damage not due to an accident, such as fire, theft, vandalism or hitting an animal) is not required, but if you want to be able to get your car back into pre-accident condition, having collision and comprehensive insurance is a good idea. (If you have a car loan or are leasing your car, your lender will probably require you to carry collision and comprehensive.)

In general, the more valuable your car, the more collision/comprehensive insurance you should have. One guideline holds that if you own your car outright, what you pay annually in car insurance premiums for collision and comprehensive should amount to no more than 10% of the total value of your car.

Home insurance

While homeowner insurance is not legally mandated in Connecticut, it is usually required for getting a mortgage.

Calculating the amount of home insurance you need is pretty straightforward. You should have enough home insurance to cover:

  • The cost of rebuilding your home
  • Replacing your personal possessions and furnishings
  • Additional living expenses you incur as a result of being displaced from your home during repair or rebuilding
  • Any liability you have for bodily injury or property damage that results from you or a family member

A recent appraisal or purchase amount is a good starting point in determining the value of your home. Don’t forget to subtract the cost of the land, which you’ll still have even if the home is gone. Be sure to account for fluctuations in the home sales market and changes in construction costs when estimating replacement amount.

Homeowners insurance covers the contents of your home as well, so keep an itemized inventory of your furnishings and other items. If you have extraordinarily valuable items like art, antiques or jewelry, have those things appraised and increase your coverage amount to cover the cost of replacing them. If your homeowner policy limits the amount it will pay to replace expensive items, you can also buy a separate policy to cover just those items.

Life Insurance

Having enough life insurance can give you the peace of mind that comes from knowing your loved ones will have adequate funds should something unexpected happen to you. But while 86% of people believe that most people should have some amount of life insurance coverage, 30% of households are uninsured and 48% are insured for an amount insufficient to meet their family’s needs, according to LIMRA.

While the amount of life insurance you have is a personal preference, you should consider a number of factors, including your income and investments, level of debt, and future education costs for your children.

One general guideline is the DIME formula, which stands for debt, income, mortgage and education. To calculate your life insurance amount using DIME, add up your non-mortgage debts and add the estimated cost of your funeral ($7,000-$10,000 is the average in North America). Then calculate how many years your family will be counting on your financial support, and multiply your annual income by that number. Then add the cost of your mortgage payoff and the estimated cost of sending your children to college (the average annual tuition cost for 2016 according to the College Board was $9,410 for state residents at public colleges and $32,405 for private colleges). Add these four numbers together, then subtract current savings and investments.

Don’t forget to take into account possible medical expenses, and the cost to replace the child care provided by a stay-at-home parent.

Adding all those numbers might give you a big amount, but remember that having a large life insurance policy won’t do you any good if you can’t afford to pay the premiums. Choose an amount that you’ll be able to maintain.

Having the right amount of car, home and life insurance can ensure that no matter what happens, you and your family are protected.

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