Morningstar.com readers discuss when to purchase insurance and when to self-insure.
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By Christine Benz | 07-22-12 | 06:00 AM | Email Article

Because Morningstar.com is an investing site, our focus is on helping people grow their assets. But protecting what you've managed to save in case the unexpected strikes--fire, catastrophic health-care costs, or premature death--is equally important.

Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz and on Facebook.

In a recent thread in the Personal Finance forum on Morningstar.com's Discuss boards, I asked users to share their personal philosophies on insurance. Which types of insurance products would they never live without, and which do they consider inessential?

A useful discussion ensued, with posters opining about and sharing personal experiences with a broad swath of products, from life insurance to disability to long-term care. Readers also shared guidance for deciding whether to purchase insurance or self-insure. That's valuable because ultimately the decision is a personal one that depends heavily on your household's financial situation. To read the complete thread or share your own views, click here.

'The Financial Equivalent of a Magnitude 9-Plus Earthquake'
When it comes to deciding which risks to insure against and which to pay out of pocket, Mwleach advised, "Insurance is supposed to be for unusual and catastrophic risks--not ordinary moderate-cost risks."

To illustrate what constitutes an unusual risk that should be insured against, Chief K shared the following example. "Unusual risk: A flooded home (unless you live in a 25-year flood zone). Usual risk: A water pipe or appliance malfunctions and water ruins a rug."

As Chief K's post illustrates, what's an affordable unexpected expense will vary by household. He provided this useful guidance. "In general, if paying for the expense means forgoing discretionary spending for a month or two, I would not insure. If paying for a problem meant six months, or more, of austere living, I'd probably strongly consider insuring. Obviously medical costs can easily fall into the catastrophe category. The less leeway you have, the more I think you need to insure. More leeway, less need for insurance."

FidlStix provided some practical examples of where to draw the line. "We skip what I call nickel & dime insurance like flight insurance or extended maintenance on autos, electronics, and appliances. [But] if an uninsured event would be the financial equivalent of a magnitude 9-plus earthquake, then we carry insurance."

In a post that was widely "amened" by other users, Douglas Johnson shared this guidance. "Never buy insurance for a risk you can afford to take." This poster went on to opine that for those risks you do decide to insure against, it's best to have a high-deductible policy with high upper limits on coverage. "Low-level losses are relatively common, so it is expensive to insure against them. High-level losses are rare, but devastating when they occur, so it is both cheap and important to insure against them. Thus, high deductibles and high upper limits."

'Carry the Best Health Insurance You Can Afford'
Most posters in the thread agreed that a handful of insurance products are essential no matter who you are or what your financial situation is--home, health, and auto were universally agreed upon as essential types of coverage. Umbrella policies, which are add-ons for homeowners' policies to provide coverage in case you should be sued, also received repeat mentions.

Rossinator summed up the basic case for these core insurance products. "For my purposes I have health, auto, and homeowners. I think you should always have health insurance, you need auto if you drive a car, and homeowners if you have a house (or renters if you rent--it doesn't seem to be very expensive)."

I asked posters to share any advice they had gleaned during their years of purchasing insurance, and several shared worthwhile guidance in the area of health care.

JHAsheville notes that for him and his partner, a high-deductible health-care plan has made sense. "As far as health care we [have a policy] with a high deductible and lower rates and pay for annual stuff with cash. It works for us, but we have it set up that we should be protected if the worse happens." (This article explains the basics of a health-savings account used in conjunction with a high-deductible health-care plan.)

WesternMass, meanwhile, urged seniors to carry supplemental coverage to defray those inevitable expenses not picked up by Medicare. "Medicare has high deductibles and only covers 80% of cost. I am not a big believer in overinsuring; however, my wife talked me into a Medicare Supplement Plan when I retired this year. This plan, along with a Part D Drug Plan, cost me $200 per month. This year I had three unexpected trips to the hospital. Total cost $37,000. My cost for deductibles and co-pays $0. This plan paid for itself already. I can go to any doctor and any hospital in the U.S. I do not need a referral or a primary care doctor. Lesson to be learned--carry the best health insurance you can afford. You never know when disaster will strike."

Rossinator warned health-care insurance shoppers that COBRA coverage, which allows one to stay on a previous employer's policy after leaving the job, can be unnecessarily costly. "If you leave your job and you are in reasonable health, don't stay on COBRA, get an individual policy right away! I retired early, and lollygagged around making COBRA payments for many months. I was told an individual policy was cheaper, but I did not realize how much cheaper. My individual policy is 40% of what my COBRA payment was for similar coverage, and the prescriptions copay is less!!!" 
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