Insurance is not only a fundamental part of most consumers' financial lives, it's also among the most confusing.
For many people, exerting effort to understand insurance is unpleasant. Perhaps that's because insurance is about protecting your finances against life's most disturbing events — car crashes, house fires, death.
Perhaps understanding a few of the basics about insurance will prompt you to get the correct insurance or rethink — and reshop for — the insurance you already have. That's important because prices can vary widely on the same exact insurance policies, and people often are surprised to learn about what is covered and what's not only after making a claim.
"There's a lot of confusion about just what's in their policies," said John Egan, managing editor for InsuranceQuotes.com. "Know what you're paying for."
Here are answers to basic questions frequently asked by consumers.
Q: How much life insurance do I need?
At its simplest, life insurance is paycheck replacement if you die. In determining how much coverage you need, you're trying to answer two questions: "Who relies on my paycheck and would suffer financial hardship if I died?" and "How much money would they be missing because I'm not working?"
Typically, you're thinking about a spouse and children who would be hurting for money. You're thinking about everything from rent or mortgage to kids' college educations.
Single, childless people who have nobody relying on their income might decide they need no life insurance.
A single breadwinner in a young family of five might need a policy worth hundreds of thousands of dollars, even millions.
"The amount is really the single-most important thing to get right," said Byron Udell, founder and CEO of AccuQuote.com.
A rule of thumb is to get term life insurance equal to about 10 times your annual gross income, but that also could be woefully inadequate, especially if you're young and your dependents have many years left to rely on your income.
Calculate your own figure at such websites as tinyurl.com/lifehappens-calc, tinyurl.com/accuquote-calc and tinyurl.com/bankrate-insurcalc.
Q: While traveling, should I buy rental-car insurance?
Probably not, if you already have auto insurance with collision and comprehensive coverage, which refers to noncollision events, such as theft, fire or vandalism. The rental-car insurance could be a waste of money.
To best answer this question, make two phone calls — to your auto agent and to the issuer of the credit card you will use to pay for the rental. Both are likely to include some coverage for use of a rental car.
"Before you get to the rental-car counter, you need to make sure you know what coverage you already have," Egan said.
Check to see whether your insurance company pays for the full value of a loss, including administrative fees, towing charges and what's termed "loss of use," money the rental company loses because a damaged vehicle cannot immediately be re-rented.
Q: How do I choose the right deductibles?
The simple answer is to choose auto and home insurance deductibles as high as you can stand. A deductible is the amount of money you have to pay before your insurance kicks in. If you opt for a higher deductible, your premiums will be lower but you'll have bigger out-of-pocket expenses if you have a claim. For example, common advice is to increase your auto insurance deductible from $500 to $1,000, which could mean a 25 percent savings on premiums. Especially if you have an emergency fund of a few thousand dollars, you should opt for higher deductibles, say, $1,000 on auto and $2,500 on home.
