Three elements for proper insurance

Question: I recently added up how much money I am spending on insurance - it is ridiculous! What do I really need and what can I drop?

Answer: When it comes to any kind of insurance, you need three things: a financial plan, guiding principles and a good agent.

Everything else, you can drop.

No one likes insurance until disaster strikes. Then we all wonder why we didn't have more. So while it isn't the most exciting thing to think about, it is one of the most important.

There are lots of kinds of insurance out there: automobile, homeowners, liability, disability, medical and life (to name the biggies).

Can you spend too much money on insurance? You bet.

But more often, I see money has simply been "mis-spent." In those cases, there seems to be no rhyme or reason to the insurance decisions that person has made.

So start with your financial plan. It should tell you what you have that is worth protecting. Don't have a financial plan yet? You are trying to build a house without a blueprint. Get one!

Once your financial "master plan" is in place, your guiding principles should help you make your specific insurance choices. I'll suggest these guiding principles:

1. Insurance is a small loss in exchange for a big risk. You pay a premium (which is a loss to you) so that if a certain catastrophic event occurs, you are financially protected. Look for the big risks.

2. Only insure against losses that would ruin you. You could park your car at the mall, go shopping, come back and never be able to find your car again…and survive financially. Yet most people think that "car insurance" is about protecting against the loss of their car. That is really the least important aspect of your automobile insurance. More important is the liability protection - not the damage done to your car, but the damage done by your car. Damage done to your car is limited to the value of the car. But damage done by your car is almost unlimited. It can easily stretch into six and seven figures.

So make sure you keep deductibles high (to save on premium dollars), but keep coverages high, too.

3. Focus on value, not price. I am all for shopping for a low price. But not at the cost of value. Would you shop for low cost parachutes? Didn't think so. Your insurance is a parachute that must open at the proper time and in the proper amount. The time to call your parachute consultant with a complaint is not while you are plummeting towards earth with a tattered rag flapping haplessly above you.

Once you've got a comprehensive financial plan in place, and are familiar with the principles that should guide your decisions, you need to find an agent (or agents) you can work with.

Insurance is a complicated and ever changing field. Very few agents do a good job of keeping up with it, much less members of the buying public who try to do it online after a hard day's work.

You need to find an agent who will work to understand your needs, who won't try to over-sell you, but who also will not simply let you buy the cheapest policy he has and go on to the next sale.

Interview at least three agents, let them each make recommendations to you based on the information you present to them and make your decision. If you work with a financial planner, CPA or other advisor, they can assist in the choice.

Above all, you want a long-term relationship with an agent that will stay current and will pay attention to your needs. In other words, you need a professional.

If you've got a plan, your principles and a professional, you'll insure that your premium dollars are well spent.