Insurance for a young adult

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My all-time favorite reader asked these questions:

So USAA dropped off a bunch of ROTC-specific ad campaigns, including one on renter’s insurance. It reminded me that, especially with a new college ring, it was definitely time for renter’s insurance.

I did the quote setup with USAA and figured out the value of my uniforms, jewelry, clothes, furniture, and electronics.

Before I accept the policy, I had some questions on the way they tallied it up. What is a deductible and a liability, and how do the two amounts relate? Since my Mac was once worth $1200 and my PC worth $600, should I also opt for additional computer coverage? Would I also need to include my car in the estimate? I know I have auto insurance but what if my car is stolen or burned (my current auto policy doesn’t cover either)? And of course, I’m glad USAA is giving me a discount for combining auto and property!”

There’s two ways to do insurance. The expensive way is to insure everything, pay lots of premiums, and “sleep well at night” knowing that USAA (or another military-friendly insurer) will help you replace it all if the movers lose it or if your apartment floods. Of course when you pay the premiums for that good sleep then you’ll “buy” your stuff all over again a little bit every year, whether or not you actually have a loss. You can pay a high price for insurance.

The other way is to self-insure as much as possible, even if you’re risking some of your savings and maybe sleeping a little less soundly at night. For example, your ring has a replacement value of $500 and USAA quoted $48/year to insure it. In 10 years you’ll have paid enough money to USAA to buy another ring, even if you never lose it. (Who’s insuring who?) Or you could self-insure by saving up that $48 every year in a money market account, knowing that you’re building a “ring replacement fund” if you need it. For the next five years in the military (especially sea duty) you have a moderate risk of losing your ring over the side or at the beach. After you leave active duty, though, it’s a very low risk and you’ll have saved enough money to self-insure. If you lose the ring during that first year, though, you’ve just lost the bet.

A deductible is the amount you have to pay for a loss before your insurance takes over. It’s probably increments of $250 up to $1000 or even higher. Perhaps you’ll opt for a $500 deductible because if you have a loss you’re willing to spend part of your emergency fund (or cash in a CD) to self-insure that part of the risk and save on premiums. If the mover’s truck crashes on the highway and $5000 of your household goods are destroyed in a fire, then USAA would pay you $4500 (=$5000-$500).

Personal liability is protection if you’re sued for all of your gross worth– not just furniture and vehicles but also your savings & investments (maybe even your Roth IRA). If you accidentally bump into someone on the sidewalk, and they fall down and hit their head to become disabled for life, then they could sue you for decades of lost earnings. The courts would hopefully limit your liability to “all of your assets”, and USAA would pay up to the limit of your liability insurance (minus your deductible). You generally want to carry liability insurance up to your gross worth (assets) for the rest of your life because it’s very difficult to self-insure for personal liability. In Hawaii we pay for a huge liability policy because we can’t self-insure the value of our home and a rental property (plus our investments) if a neighbor slips on our wet driveway.

Your personal liability policy might carry a deductible, but otherwise the two terms are not related.

Insurance companies market to our fears and uncertainties, and they tend to overlook the frugal aspect of personal property. They’re still recommending that people insure their stuff for replacement value instead of for the depreciated “actual cash value”. They may think that you’re going to go to Ethan Allen Furniture for a brand-new sofa to replace a five-year-old sofa lost in a fire, so they want you to insure it for $1000 replacement value. If you insured it for ACV, then they’d only give you $500. However, you know that you’d replace that sofa from Craigslist, so you really only want to insure it for $250. When the movers accidentally drop your household goods container into the harbor water (yes, this really happened), what would you replace from Craigslist? A bed, a sofa, some tables & chairs? Perhaps you’d spend $1500. You could spend money from your emergency fund, cash in one of your CDs, or pay USAA a hundred bucks per year to insure them.

Electronics (especially computers & TVs) depreciate incredibly quickly. Your Macbook cost $1200 in 2009 but after four years you’d be lucky to get $250 for it. Your PC may have cost $600 in 2010, but today Craigslist says that it’s not even worth half of that. Yet you know that you can buy a used iPad 2 & keyboard for about $250, and that does almost as much as the PC. It’s probably better to insure electronics for actual cash value– but make sure that you save money in a separate fund to pay for a replacement.

The items you definitely want to insure for replacement value are your military uniforms, insignia, and jewelry. If you had to replace them then you’d probably have to pay the uniform shop pretty much the same price (or a little more) than you paid a few years ago.

Finally, there are “nice to have” things that you might never replace. These can be difficult personal decisions, especially if the item has sentimental value. If the movers lost (or stole) your marine navigation kit, would you replace it? Do you want to spend money to insure it if you’re not likely to replace it? Would you spend $50/year to insure a Navy sword that’s only used at weddings and cake cuttings, especially when you’re not “required” to have it in your seabag? What if it was used at your wedding– would you still insure it?

When I was wearing uniforms, I insured them for full replacement value. I insured furniture & electronics for what I could buy through Craigslist, not at stores. I didn’t insure my paperback books, my class ring, or my framed posters. As my spouse and I built our net worth then we kept reducing our personal-property insurance and assuming more risk as self-insurance. As we got close to retirement (and stopped moving every few years), we canceled our personal property insurance. We still carry homeowner’s insurance (to rebuild the house) and personal liability (for our gross worth).

Car insurance is separate from personal property insurance, so you don’t include your car’s value in your personal property insurance estimate. Once a car is over five years old, it’s usually not worth the expense of the premiums to carry comprehensive/collision insurance. Financially savvy car owners save $100 every month for a “car replacement fund” and hope to keep driving their cars for a decade or longer. We carry Hawaii’s required auto insurance with liability coverage, but our Priuses are old and hard to steal. If we dented a fender then we might not even bother to fix it.

Every time you raise a deductible or decide to self-insure to save on insurance premiums, you have to bank the money that you’re saving. That savings will pay for your deductible or help you replace something if you lose it. If you just spend the savings on other things then you’re depleting your savings and at even more risk of a personal property loss.

So here are my recommendations:

  1.  Insure your uniforms & insignia for replacement cost.
  2.  Insure your class ring (if that’s important to you) or set aside extra savings in your “ring replacement fund”.
  3.  Insure your furniture for its Craigslist replacement value.
  4.  Insure your electronics at the cost to buy the minimum replacements. (That’s probably between $250-$1000, depending on whether you’d prefer a cheap iPad 2 or a Macbook Air.) I would not pay for “additional computer coverage”– especially when it has a $250 deductible.
  5.  Computer monitors, smaller TVs, iPods, and cell phones seem pretty cheap. Maybe you want to self-insure. Bank the premium savings for your replacement fund!
  6.  You should carry at least a $250 deductible on personal property and liability policies. (Since you already have savings, you might even be willing to self-insure for a $1000 deductible.) Check the difference in premiums and see how much you’d save over 3-5 years. Bank that savings to cover your higher deductible!
  7.  Carry liability insurance for your gross worth– the value of your investments and your possessions. That’s what you’d be sued for if you accidentally ran over someone on your bicycle.
  8.  Auto insurance is completely separate from personal property insurance, and you have your own separate auto liability insurance. (In case you loan your car to a friend who T-bones a school bus full of lawyer’s kids.) You probably carry auto liability of about $50K and property damage of $100K (if your car rear-ends a Ferrari).
  9.  You could probably replace your transportation for less than $5000. Right now you’re carrying all of the risk for fire & theft, and if those happened then you’d have to grit your teeth, cash in a CD, and start reading Craigslist car ads. Keep adding money to your vehicle replacement fund every month!

As a young single adult, it may be a few years before you need life insurance. The military will offer cheap Servicemember Group Life Insurance when you’re ready. We can review that decision another time in another post, or read the related links below.

 

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Related articles:
Lessons learned on insurance
Tricare, vehicle insurance, and uninsured/underinsured motorists
Pricing insurance and investments
The finances of used cars

 

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WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

2 Comments
  1. Doug,
    Good rundown on what a new college grad/Second Lieutenant/Ensign would be facing with regards to insurance options. She’s lucky that she can turn to you for advice on such things. As a young 2LT, I was flying by the seat of my pants and doing some discovery learning along the way when it came to personal finance. I at least knew I needed renter’s insurance (sadly, it is an all too often story of Soldiers not getting renter’s insurance and their apartment comes up in flames – wish I knew this when I was a Platoon Leader so I can counsel young Soldiers on such things) and of course car insurance…but I didn’t really pay much attention to the details and fine print.

    I didn’t really know about umbrella insurance either until I was a senior Major, when one of the Lieutenant Colonels I was working with while deployed to Afghanistan, informed me about it. I did my research and realized I was exposing our nest egg/retirement to substantial risk by not having excess liability coverage, and pulled the trigger on a policy soon thereafter. By the way, at what point would you think it’s prudent to get umbrella insurance (i.e. after a net or gross worth in the 6 digits or sooner)?

    • Thanks, Mel!

      I did a lot of my own discovery learning during my 20s, too. These days I’d certainly start shopping liability insurance when gross worth approaches six figures– especially vehicle & homeowner liability insurance. An umbrella liability policy would be needed when those other policies reached their limits or if the insured had other lifestyle risks– like flying an ultralight aircraft or shooting firearms.

      I use “gross worth” instead of net worth because I don’t think the court system cares about a defendant’s mortgage or student loans…

    Comment? Question? What's on your mind?