Deductibles? Term life? Rental? Solving the insurance puzzle

Insurance is not only a fundamental part of most consumers' financial lives, it's also among the most confusing.

For many people, exerting effort to understand insurance in its various forms is unpleasant. Perhaps that's because insurance is about protecting your finances against life's most disturbing events — car crashes, house fires, death.

Understanding a few of the key aspects will prompt you to get the correct insurance or rethink — and reshop for — the insurance you already have. That's important because prices can vary widely on the same insurance policies, and people often are surprised to learn about what is covered and what's not only after making a claim.

"There's a lot of confusion about just what's in their policies," said John Egan, managing editor for InsuranceQuotes.com. "Know what you're paying for."

Here are answers to key questions frequently asked by consumers.

How much life insurance do I need?

At its simplest, life insurance is paycheck replacement if you die. In determining how much coverage you need, you're trying to answer two questions: "Who relies on my paycheck and would suffer financial hardship if I died?" and "How much money would they be missing because I'm not working?"

Typically, you're thinking about a spouse and children who would be hurting for money. You're thinking about everything from rent or mortgage to kids' college educations.

Single, childless people who have nobody relying on their income might decide they need no life insurance.

A single breadwinner in a young family of five might need a policy worth hundreds of thousands of dollars, even millions.

"The amount is really the single-most important thing to get right," said Byron Udell, founder and CEO of AccuQuote.com.

A rule of thumb is to get term life insurance equal to about 10 times your annual gross income, but that also could be woefully inadequate, especially if you're young and your dependents have many years left to rely on your income.

Calculate your own figure at such websites as http://tinyurl.com/lifehappens-calc, http://tinyurl.com/accuquote-calc and http://tinyurl.com/bankrate-insurcalc.

While traveling, should I buy rental-car insurance?

Probably not, if you already have auto insurance with collision and comprehensive coverage, which refers to non-collision events, such as theft, fire or vandalism. The rental-car insurance could be a waste of money.

To best answer this question, make two phone calls - to your auto agent and to the issuer of the credit card you will use to pay for the rental. Both are likely to include some coverage for use of a rental car.

"Before you get to the rental-car counter, you need to make sure you know what coverage you already have," Egan said.

Check to see whether your insurance company pays for the full value of a loss, including administrative fees, towing charges and what's termed "loss of use," money the rental company loses because a damaged vehicle cannot immediately be re-rented.

How do I choose the right deductibles?

The simple answer is to choose auto and home insurance deductibles as high as you can stand. A deductible is the amount of money you have to pay before your insurance kicks in. If you opt for a higher deductible, your premiums will be lower but you'll have bigger out-of-pocket expenses if you have a claim. For example, common advice is to increase your auto insurance deductible from $500 to $1,000, which could mean a 25 percent savings on premiums. Especially if you have an emergency fund of a few thousand dollars, you should opt for higher deductibles, say, $1,000 on auto and $2,500 on home.

"It's a balancing act," Egan said. "You need to make sure your finances are in order so you can handle that higher deductible. Really, it's a gut check."

Should I buy term life insurance or permanent insurance?

In short, buy term life insurance and only buy pricey permanent insurance — whole life, universal life and variable life — if you fully understand the policy, its costs, its rate of return and exactly why you need it instead of term life insurance. That alone will dissuade most people because permanent policies are so complicated.

By contrast, term life insurance is relatively easy to understand. It pays your beneficiaries a lump sum if you die during the term, typically 10 years, 20 years or 30 years. There's no investment component.

Who needs renters insurance?

Renters insurance typically covers your personal belongings against damage and theft and provides some liability coverage if someone is injured in your apartment and sues you.

"If you're a renter and do not have renter's insurance, you're putting yourself at great financial risk," Egan said. "People think, mistakenly so, that their landlord's policy is going to cover belongings. It doesn't."

Fortunately, renters insurance is fairly cheap, often in the ballpark of $16 per month. Yet only 31 percent of renters buy it, according to the Insurance Information Institute.

Should I buy life insurance for a child?

The typical answer is no. Not only is the probability of a child dying remote, but your household doesn't rely on a child's income and would not suffer financially because a child died - outside of funeral and burial expenses.

You could consider a small policy to reimburse yourself for funeral expenses, but get the proper amount of life insurance on the family's breadwinners as a higher priority.

To answer more of your insurance questions, go to such sites as III.org, InsureUOnline.org and LifeHappens.org.

Gregory Karp, the author of Living Rich by Spending Smart, writes for the Chicago Tribune. Readers may send him email at gkarptribune.com. —

To calculate how much insurance to buy

http://tinyurl.com/lifehappens-calc

http://tinyurl.com/accuquote-calc

http://tinyurl.com/bankrate-insurcalc —

Advice on buying life insurance for a child

III.org

InsureUOnline.org

LifeHappens.org