The insurance industry is enormous and can be quite intimidating. Insurance is being sold for almost anything and everything you can imagine. Determining what’s right for you can be a very daunting task. Hopefully I’ll be able to shed some light on the subject.

First of all, insurance is a product. There are companies that sell it and consumers that buy it. Don’t falsely believe that insurance companies are doing some sort of charity work by offering a huge payout in exchange for small monthly payments. Insurance companies are in the business of making money and they do it very well.

This doesn’t mean that you shouldn’t ever buy insurance. You just need to determine what’s right for you, and this isn’t necessarily what a company may say is right for you. We need to understand what the purpose of insurance is.

Insurance should be bought to protect you against a calamity that would otherwise be financially devastating.

Let’s take a few examples and hold them up against this criteria.

One type of insurance I see advertised is a life insurance policy for children and even babies. The attempt here is to play on your emotions because you love your children right? If (heaven forbid) you were to lose a child, it would be devastating emotionally, but is a cool half million going make it better? A family (usually) doesn’t rely on a child’s income to maintain their standard of living, so why would you need to insure them?

Now let’s examine auto insurance. A certain level of coverage is required by law, but this is mainly to cover the other party in case of an accident being your fault. The other options are exactly that, options. If having your car totaled in an accident would devastate you financially, there’s a case for more insurance. If you would be unable to come up with $100 to repair your car, you’d probably want a really low deductible, but you’d be paying higher premiums. Once you have an emergency fund, you should be able to handle a much higher deductible such as $1,000 or even $2500. This can significantly lower your premiums.

This same line of reasoning can apply to adult life insurance. Say you currently have a 20 year term policy. After actively saving and investing, when the term is up, you don’t necessarily need another insurance policy. If you’ve already got a couple hundred thousand to a million stashed away, would your loved ones be financially strapped if you were to pass away unexpectedly?

I realize that every situation is unique, but some thought should be put into what amount and type of insurance you need, if any at all. Also, realize that situations change over time and what was once right, may not be anymore. Take a look at your current policies and see if you could save some money by raising the deductibles. Maybe there are policies that you no longer need at all. It can’t hurt to review them from time to time.

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