We talk to people all the time who say that they are insurance poor and that they have too much insurance. I completely understand being insurance poor as there are so many critical types of insurance that you should buy for yourself. My list of insurances grows all the time and now I have life, health, disability, homeowners, flood, car, dental, and vision. After buying all of those, I feel like I have protected just about every basis possible.
All of these are critically important and some are even required by law to carry. My goal is too have maximum protection for all of the key areas of risk. When I say maximum protection, I mean full replacement value of what you are insuring. For example, if my car is worth $40,000 and I total it, I want full replacement of $40,000 from my insurance company. If I become disabled and can’t work, I want to make sure I can replace my income as close to its current level as possible. Not to belabor the point, but if my house burns down, I want full value from the insurance company.
I try to calculate life insurance in the same fashion. What is my full value to my family? I want the insurance company to reimburse the full 40k for the car and the full amount to my family. I doubt my family is going to get a check after I pass away and say, “gee, this is too much”. I am not suggesting to overinsure, but rather to be consistent and try and protect full value on important assets like yourself.