Is it smart to buy insurance to protect against layoffs?
DEAR DAVE: Some of the people I work with have been buying into a new kind of supplemental insurance that protects against layoffs. It costs about $30 a month per person, and the full payout if you’re laid off is $9,000. It seems to me you would have to be paying in for a long time to see that kind of return, so I wanted to see how you feel about this kind of thing.
— Steve DEAR STEVE: Anytime insurance is there for something you could cover yourself, it’s a good idea to stop and remember that every insurance company is still a business. They must cover all the costs of operation, plus make a profit. Believe me, that takes a lot of money.
Statistically speaking, if lots of people cashed in on a policy like this, an insurance company would go out of business. We’re talking about only $30 a month to cover $9,000. That alone tells you not many people cash in. It’s gimmick insurance.
On average, you’re losing money when you buy insurance of any kind. Again, on average, over the scope of your lifetime you’d be better off simply saving money and selfinsuring against things like this. The only things I recommend buying insurance for are things you can’t afford to cover personally. But you can afford to cover a layoff by saving an emergency fund of three to six months of expenses. If I’m in your shoes, Steve, I’m not buying that stuff.
DEAR DAVE: I just filed taxes and it looks like I’ll get a pretty big refund this year. A friend of mine told me I should adjust my withholding, so I don’t get a refund. This seems pretty dumb to me. Why would I change my withholdings when I’m getting money back?
— James DEAR JAMES: The only reason you’re getting a refund is because you had too much taken out of your paychecks in 2017.
Let’s say your refund is $3,500. Basically, you loaned the government $3,500 of your own money, interest-free. A refund isn’t a gift or reward, James. It’s your own cash that you get back because you paid in too much during the previous year. In your case, that adds up to almost $300 a month!
Instead of loaning the government money that you worked hard to earn, wouldn’t it be a better idea to keep it in your own pocket?