The Millennial Guide To Managing Risk With Insurance

Originally in Forbes“I’m too [fill in the blank] to worry about insurance.” If you’re a millennial, there are plenty of words you could choose from to complete that sentence. Perhaps “young,” “poor,” “busy” and “skeptical” are good ones (for starters).

You might have enough insurance.  You might even have too much.  But I’d bet you don’t have as much as you need in some categories, too.  Regardless, ignorance is neither blissful nor beneficial at any age, so let’s ask and answer the questions below, reviewing the most prominent types of insurance that may—or may not—be important for you to consider.

First, allow me to offer a fundamental insurance lesson that will serve you well now and into the future: Don’t just buy insurance. Instead, manage risk.

I offer the following Risk Management Guide as a template for making insurance decisions in my book, Simple Money:

Risk Management Guide

Consider applying this guide to the risks inherent in driving a vehicle: Driving while under the influence of alcohol (or texting) offers a tiny reward relative to the potential risk involved and can easily be eliminated. Driving at a reasonable speed and wearing a seatbelt drastically reduces the risk of having an accident, as well as the risk of serious injury. We assume the risk of being involved in an auto accident every time we get in a car, but we can also limit some of the associated financial risk we assume by setting our auto insurance deductibles at a manageable level. The catastrophic financial risk that most of us couldn’t easily endure involves liability—for example, a large legal suit if we are at fault in an auto accident. That’s where insurance comes in.

How, then, can millennials best manage life’s most prominent financial risks—with and without insurance?

Do you own a car?
If not, skip to the next question. If so, it’s important to know that most drivers, and especially younger drivers, are underinsured because they don’t have enough “Bodily Injury Liability” coverage. If you’re at fault in an auto accident and you’re sued for a million dollars, it’s your liability coverage that picks up the tab—part of the tab, that is. If you decided to save money on your premiums by reducing your liability limits to, say, $50,000 per person injured up to a maximum of $100,000, that means you could be on the hook for $950,000 (if only one person was hurt in the accident). Consider increasing your limits to $250,000/$500,000, and also take a look at adding an umbrella policy—often reasonably priced—to bring your liability coverage up to or beyond $1 million.

But as a risk manager, you can save money on your premiums by assuming more non-catastrophic risk and raising your deductibles. Why pay more in premium for a low $50 or $100 deductible if you wouldn’t make a claim for anything under $1,000? If you have sufficient emergency cash on hand, you can increase your deductible to $500 or even $1,000 and enjoy a reduction in your premiums to help compensate for the addition of more catastrophic risk coverage.

Do you own or rent your residence?
The biggest risk here, again, is liability. You might already know that if someone slips and falls on your property and sues you, the liability coverage that comes with your homeowner’s insurance (and perhaps umbrella policy) will pick up the tab. But did you know that the liability coverage attached to your home or apartment also follows you outside of your residence? Another risk that is often overlooked is the contents of your homestead. Make sure your coverage limit is sufficient to replace all of your clothes, appliances and audio/video equipment if it were all to go up in smoke. Do a video inventory of your home’s contents as proof of ownership (and store the video outside of the home, for goodness sake, or better yet, in the proverbial cloud).

Do you have a pulse?
If you’re a living American, you’re now required to have health insurance—at least the Minimum Essential Coverage—under the Affordable Care Act, unless you’d prefer to pay a fee similar to that of an average health insurance policy premium.  (Paying for coverage that you don’t actually receive would be a poor risk management decision, by the way.)

I know, I know…you never go to the doctor, right? I understand. I was invincible once too, until I had a near-fatal car accident at the age of 18. I’d still be paying off the medical bills at 40 if it weren’t for health insurance. If you’re healthy, by all means, assume the risk of regular doctor visits with a high-deductible health plan (hopefully used in conjunction with a Health Savings Account, potentially making every qualifying out-of-pocket health-care expense tax-deductible). But don’t roll the dice on catastrophic health-care risks by going without health insurance.

Does anyone in your life rely on you financially?
There are those—life insurance agents, predominantly—who advocate buying a life insurance policy before you need it, because “you’re young and healthy and the coverage will be cheap.” While this might be true, I’m not a proponent of insuring needs you don’t have. That’s not efficient risk management. However, if anyone relies on you financially, you do have a need for life insurance, at least if you’d like their lives to go on monetarily unimpeded if you’re gone.

If you’re coupled sans kids, just get enough coverage to pay off debts and mortgages. If you have kids, and the household relies on your income, multiply your average annual income by 15 and purchase that amount of term life insurance with a duration for as long as your income is needed. (You can learn more about that logic in my post, “10 Things You Absolutely Need To Know About Life Insurance.”) There are virtually no circumstances in which permanent life insurance—whole, universal or variable life—is appropriate for a millennial. Term life covers the catastrophic; dollars you’d be using for permanent life insurance are better spent on bigger risks, like…

Is your primary source of income your paycheck?
I’ve saved the most important—and least understood—for last. If you’re a millennial with most of your career in front of you, it’s almost certain that your biggest “asset” is your ability to generate income into the future. Disability income insurance pays a portion of the income you’d lose in the case of a disabling injury. Disability income insurance covers the money-printing machine in your basement. (That’s you.)

I recommend you apply your attention (and your premium dollars) to long-term disability income coverage over short-term coverage, because the longer-term variety supposes a more catastrophic risk. Unfortunately, the product is complex enough that it requires its own post.

What insurance do you have through work?
If you work for an established company, the chances are good that you have some group insurance (coverage that is part of your benefits package at work). But if you’re like most millennials, you likely don’t expect to retire from the company for which you currently work. Therefore, you don’t want to lean too heavily on your group benefits, most of which are unlikely to follow you when you leave.

For life insurance in particular, consider taking whatever they give you for free and look into a personal policy for your longer-term needs. For disability income insurance, you’ll likely have to blend the coverage you get from work with a supplemental personal policy to meet your needs. But in most cases, you’ll rely on your group health insurance plan because it is a more common (and highly regulated) benefit than most.

What’s the point?
Few of us enjoy talking about insurance. I suspect a lot of that has to do with the fact that we don’t love spending money on stuff that might protect us from events we hope never happen . But for most of these risks, it’s not so much a question of if, but of when. And when that time comes, you’ll be glad you took the time and spent the money to transfer the risk you’re simply unable to eliminate, reduce or assume.

I’m a speaker, author, wealth advisor and director of personal finance for Buckingham and the BAM Alliance. Connect with me on Twitter, Google+, and click HERE to receive my weekly post via email.