Friday, January 22, 2010

Thrift Week, Day Six: Insurance

Today's topic is insurance, which I realize I actually should have covered back on Day Four, because it's the fourth-largest expense in the average household budget ($5,605 per year, or 11.1 percent of total expenditures). What's odd is that this figure covers only "personal insurance and pensions." It doesn't include health insurance (which is covered under medical expenses), auto insurance (under transportation), or homeowners/renters insurance (under housing). Instead it covers "life and other personal insurance" and "Social Security and pensions." This makes it a tricky topic for me to address, because we actually don't have a entry in our budget for these expenses. They either come out of the Troll's paycheck before he lays hands on it, or they get lumped in under taxes and savings. So these are sort of "invisible" expenses for us.

In fact, I have to admit that I don't really think of these as "expenditures" as all. I mean, an expenditure is money that you spend--you pay it to someone, and you (presumably) get something in exchange. But Social Security contributions aren't an expenditure; they're part of your taxes. Taxes aren't so much an expenditure as a force of nature, like the weather. You may not like the weather, and you may not like the way your tax money gets spent, but in either case, there's not a whole lot you can do about it (not directly, at any rate). So you pretty much just have to live with it.

As for "pensions," well, I'm not entirely sure what they mean by that. I think of a "pension" as a kind of guaranteed benefit that you get from your employer or, in some cases, from the government--not one you pay for yourself. But it sounds like the Bureau of Labor Statistics is using the term to include all types of retirement funds. The thing is, contributions to a retirement fund aren't really an "expenditure" either. You're not spending that money; you're saving it for the future. True, that means you don't have it right now to spend on something else, but the money isn't gone. It's still your money, just set aside for retirement.

So as far as actual expenditures go, areas in which you could save money by making smarter choices, that just leaves life insurance in this category. And that's an area about which I know little to nothing. I've never actually paid for a life insurance policy in my life. I've never needed it because there's never been anyone dependent on my income. And the basic life insurance policy that comes with the Troll's work benefits would be quite adequate to take care of me if he died unexpectedly. So I guess the only useful advice I can offer about life insurance is to figure out how much you need, and carry that much and no more.

Here's how my favorite financial writer, Andrew Tobias, put it in his The Only Investment Guide You'll Ever Need:
If you're single with no dependents, you need little--to assist with burial expenses and, posthumously, pay off debts--or none. The great push to sell college students life insurance is not entirely unlike the selling of ice to Eskimos, except that a lot more insurance is sold that way than ice.

If you're married, with a hopelessly incompetent spouse, a family history of heart disease, and a horde of little children, you should carry a great deal of insurance. Less if your spouse has a reliable income. Less still if you have fewer children or if those children have wealthy and benevolent grandchildren. And still less as those children grow up.

If you are very rich, you need no insurance at all, except as it is helpful in providing liquidity to settle your estate. If you live richly off a high income but own outright little more than a deck of credit cards and some cardigan sweaters, it will take a lot of insurance to keep from exposing your dependents to an altogether seamier side of life when you are gone.
I guess you can probably tell why he's my favorite financial writer. How many other financial writers are actually fun to read?

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