For the Newly Graduated,
A Primer on Insurance
By Albert B. Crenshaw
(c) The Washington Post
Sunday, May 28, 1995; Page H01
New graduates have a lot to worry about.
Getting a job, for one thing; finding a place to live for
another. Then there are all those social-life questions that occupy young minds.
Likely to get lost in all these concerns is one that was all but unknown a generation ago, but is a
real issue in today's financially complicated world: insurance.
The reason young people overlook insurance, experts say, is that in most cases they have never
had to think about it. They have been carried on their parents' health and liability policies, they
typically don't need life insurance, and their possessions -- well, if somebody steals the stereo, too
bad.
But graduation can mean an end to eligibility for some of these coverages, and the possessions and
responsibilities that go with a separate residence or perhaps even a family can pose new
requirements.
A generation ago, the most that new graduates needed was auto coverage.
Medical costs were
low, and so was crime -- assuming the graduate had anything worth stealing.
Today, though, a
serious illness, unlikely though it is, can be ruinous. So can an auto accident, and many of the other
perils in American life.
This is all great news for insurance agents, of course. They will be more than happy to sell you all
the coverage you need and unfortunately a lot more, if you let them. So experts, including some
agent groups, urge young people to do at least a modest amount of self-education, finding out what
insurance they really ought to have and what they can do without.
The average family spends 6.3 percent of its income on insurance, but three out of five who have
insurance don't understand their policies, said Peter van Aartrijk Jr. of the Independent Insurance
Agents of America, a trade group based in Alexandria.
"I think people with a little bit of effort could pick up a lot of information that could not only save
them money but get them the protection they need," he said.
Insurance falls into three broad categories: life, health and property.
Within these groups there are lots of variations, but fundamentally they are fairly simple. Life
insurance pays a benefit to your heirs or estate when you die. Health covers major medical bills
(the days when such insurance covered all medical bills are essentially gone). Property insurance
covers things you own, such as your car and household possessions, against loss or destruction. It
also protects you against liability arising from your property, notably car accidents.
So what do you need?
To begin with, you probably do not need life insurance. This coverage is meant to protect your
survivors economically if you die. If you are single, or married with no children and have a spouse
who could earn a livelihood without you, you don't need this protection.
Insurance salespeople tout the investment value of certain types of policies, and note the favorable
tax treatment they get. But there are other tax-favored places to put your money -- your 401(k) or
other retirement savings, for example -- so make sure you max them out first.
Don't put life insurance out of your mind entirely, though. If your circumstances change -- you have
a child, or your spouse quits work or you start your own business -- life insurance may become
very important.
Health insurance, on the other hand, is essential. Up to now, you've probably been covered
through your parents' policy. But after you turn 18 (or 22 if you've been a full-time student) most
such policies stop covering you.
Most Americans get health insurance through their employers, so if you can obtain it that way, do
so. If you are in good health, you may want to opt for a health maintenance organization or a high
deductible because the premiums are lower and you probably won't have many claims.
If you are not eligible for employer coverage, it's going to be tough. If you have a job lined up and
only need coverage until you start, a number of companies offer short-term policies that you might
be able to afford. For longer-term needs, Blue Cross plans in most areas offer some sort of
bare-bones policy, but it is still expensive. Check with HMOs in your area to see if they take
individuals and if so what their premiums are.
Another coverage you should consider is long-term disability. This insurance is designed to make
up for lost earnings if you are laid up. Surprisingly, the likelihood of being disabled is greater for
most people than the likelihood of death during a given period of time, yet millions of people don't
carry this protection. It is often available through employers, and it is worth signing up for,
especially if you have dependents.
On the property front, you of course need liability coverage for your car. In most states, you can't
drive without it. But there are all sorts of other coverages you may or may not need.
One is medical coverage. This pays medical costs for you, your passengers and others regardless
of who was at fault in an accident. But if you have regular medical insurance, that will cover you
and your family so you may not need further coverage. If others are injured and you are at fault,
the liability portion of the policy addresses that.
Collision coverage pays for damage to your car, and comprehensive, or other-than-collision,
covers things such as fire, theft, break-ins, vandalism and storm damage. The value of these
depends somewhat on your car. If its new and expensive, you'll want the protection. If it's a
15-year-old rust bucket, it makes sense to skip the coverage and put the premium toward a new
car.
Likewise for deductibles, the amount you have to pay before the insurance kicks in. Many experts
recommend opting for the highest deductible you think you could pay because it cuts the premium.
If you are careful to save the premium savings and go a few years without an accident, they will
sometimes add up to enough to cover the deductible.
Finally, new graduates aren't likely to be homeowners, but some may want to consider renters
insurance. This covers fire, theft and the like, and provides liability protection if someone is injured
in your apartment. It's generally not expensive and if you have lots of expensive possessions --
clothes, electronics, computers -- a renters policy is probably worthwhile.
In buying insurance of all types, the place to start is your employer. Big companies typically offer a
wide range of coverages, and depending on the policy may contribute some or all of the premium.
For things you can't get through work, try both insurance agents and direct writers. Direct writers
are those, such as Geico Corp., that sell policies over the telephone or by mail.
Get many price quotations -- you'll be stunned at the range for the same coverage -- and ask if
there are package deals offering lower premiums for several different kinds of coverage.
Also, do some reading. Public libraries have books on insurance that you can leaf through. The
Independent Insurance Agents group offers a booklet briefly describing various types of insurance.
It's called the "Graduate's Independent Guide to Insurance." Free copies are available by calling
1-800-991-7722.
Insurance is no fun, but it involves a lot of money, so even though you've graduated from school,
it's still a good idea to do your homework.
