One of my favorite stand up acts of all time is Chris Rock's "Bigger and Blacker." In one of the segments, he talks about insurance, or what he terms, "In Case Sh%^&" He says, "I give a company some money in case sh*%& happens....Now if sh&%* don't happen, shouldn't I get my money back?" Yes, Chris, from a moral standpoint you should. But in terms of business, if you got your money back, there would be no insurance company in the first place. Insurance is an interesting concept, brilliant actually. Insurance companies play the odds. Basically, they charge their clients premiums (periodic sums of money), aggregate them to decrease risk, and then use the pot of money to compensate situations in case sh*%&^. Most of the time nothing happens, and that's how insurance companies profit. As a starting professional, how should you approach insurance?
Now you can insure anything...that's right, if you wanted to purchase insurance for your right little toe, you could do it. So the question is, should you? I don't care how much you value your toe...the answer is, NOOOO. Do not insure your toe. Why? Because even if you lose it, you'll be fine...unless you're a foot model, in which case you have other issues. So the principle here is, only insure those things that are significant to you, and in personal finance, that translates into things which could potentially devastate you financially if they were damaged or lost. Maybe you've heard this already, but how is it different for a starting professional?
Well, for most people, when they are starting out, they don't have much in assets. Remember we talked about the fact that human capital is far more abundant than financial capital in the beginning. So the number one thing to insure for starting professionals is health. Most people don't realize how important health is when it comes to finances. I'm not just biased because I'm a doctor, but if you came down with a serious illness, it would not only impede your capability of making money, but healthcare these days is ridiculously expensive. As doctors, we write prescriptions every day, incognizant of how much they cost. But when I started a small clinic last year and actually had to buy medicine to stock my office, I realized just how expensive they were. Also, did you know that the average cost of a day in the hospital is in the thousands? So it is important to take care of yourself--to eat, sleep well, and exercise, so that you can prevent illness. And it's important to have health insurance.
Some people may say, why do you need health insurance when you're young? Yes, it's true that insurance is more important as you age, because the chance of getting sick increases. But remember, all it takes is one car accident or one obstruction of your appendix to land you in a hospital, and if you had no insurance, that's thousands of dollars a day leaving your bank account. That would be considered a financially devastating situation for most starting professionals. In terms of what type of plan you should purchase, for most insurance plans, the more extra benefits they cover, the higher the premium. For instance, most plans cover hospital stays, but if you wanted a plan to cover regular office visits or prescriptions, the premium would be higher. To start, choose a plan which is weighted more on covering hospital stays, and these conveniently are the cheapest in terms of the premium. Because you don't want to give the insurance company more money to cover office visits, when you are only going one or two times a year to the doctor. And even if, for some reason, you were sick more than usual and had to go ten times a year, that would not ruin you financially.
When we talk about insurance, we need to talk about deductibles as well. A deductible is an amount that you agree to pay before the insurance plan kicks in. For instance, if you were admitted to a hospital, and your hospital deductible is $1000, the hospital expenses would have to reach $1000, before your insurance company starts paying the bill. The deductible affects the premium such that lower deductibles usually mean higher premiums. When deciding on a deductible, again think about how much you can potentially afford to pay and not devastate yourself financially.
Ok, so what else should you cover?...no, we're not insuring the other toe... Probably the only other important asset most starting professionals have is their car. Not to mention that it is the law in most states, but yes, everyone should have auto insurance. For cars, you pay a premium for an agreed-on maximum amount the insurance company will pay for an accident. There are a bagillion different types of auto insurance, so I would recommend you discuss it fully with your insurance agent, but try to get as much as you can afford, the minimum being comprehensive, liability, and collision coverage.
What about life insurance? That sounds like a good idea, right? What's more important than your life? As far as most beginning professionals are concerned, the answer is NOOO. "The answer is NOOOO!"--that should've been the title of this post. Life insurance is only practical if you have dependents, people like your children whose lives rely on your income. Now, there will be insurance agents who will try to sell you a variable policy, which is one in which they invest your money for you. They will tell you that in 40 years when you pass away, your money will have grown and your children then can benefit from the policy payout. I'm sorry, but 40 years is a long time to accurately predict what your situation will be. Even if you're a hundred percent sure you're going to have kids, how do you know they will be dependent on you? How do you even know you'll live that long? God forbid, but what if you die next week? And why do you need an insurance policy to invest your money, when you can do it on your own? The answer is NOOOOO!
One last example. Let's go back to our TV shopping experience. When you are paying for the TV, the salesman tells you about an insurance plan, that for an extra two hundred dollars, extends the existing warranty by 3 years. That happens all the time, right? By now, you know what the answer is. Don't think about how much more than $200 it may take to fix or replace the TV, but instead, ask yourself if that is going to cripple your finances, and usually the answer's NOOOO.
I feel like I made a lot of friends with insurance agents with this post. Anyway, until next time, may you make some moolah.
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