Does your insurance meet your needs?

Jean Chatzky TODAY Financial Editor • Profile • E-mail

What's everyone's least favorite financial subject? I'll give you a clue. It's the one you pay for and you pay for and yet you hope you'll never have to use it.
That's right. Insurance. 

So you can understand why I was intrigued when I got an e-mail from Robert Pagliarini, author of "The Six-day Financial Makeover" (St. Martin's Press) suggesting that most Americans are both overinsured and underinsured. We're paying too much for coverage we don't need, he said. We're buying too little over coverage we actually do need.

Leveling the playing field can be a difficult, but by no means impossible, task. The best way to do it is to be armed with information and a clear picture of your needs — and those of your family or dependents — not just today but in the future.

First, determine where you're overinsured. That way, you can distribute those savings to policies with too little coverage — without feeling a big squeeze on your wallet. Start with your life insurance policy, which falls under one of two categories: Permanent, designed to provide protection throughout your whole life, and term, which is limited to a specific time period — often a good choice if, say, you just need to ensure your children have enough money to get through college.

"Life insurance is usually sold to someone by a broker or agent. This person gets a commission, so the more you buy, the more they get paid. A lot of them will try to sell you a permanent policy, when all you really need is a term policy," says Pagliarini. Use an online calculator, like the one found at life-line.org, to determine your needs, but a general rule of thumb is 10 times your annual earnings.

Then look at where you're under insured. The likely areas — auto and disability. Each state has a minimum auto insurance requirement — in New York, you need bodily injury liability coverage of at least $25,000 per person (up to $50,000) and property damage liability of $10,000 — but it's often not enough, says Pagliarini. "A lot of people take only the amount required, because it's the cheapest. But if you're involved in an accident, you could find yourself in a serious financial situation."

So how much do you need? That depends on your assets. Roughly add them up and run your numbers with an online calculator like the one at esurance.com. As for disability insurance, it's an area too few people even consider. If you have it, it's likely provided through your employer. However, if you can afford it, you should consider adding a private policy as well, says Pagliarini. Why? Your employer's coverage will likely only make up for about 60 percent of your annual salary. If you're ill or injured or otherwise unable to work for a long period of time, that amount of money will soon start to pale. Look for additional coverage to get you to 70 percent of your annual salary if not a little more. Know that, in many cases, adding additional policies won't cost you a fortune, but not having enough coverage might.

Kimberly Lankford, author of "The Insurance Maze: How You Can Save Money on Insurance and Still Get the Coverage You Need," says that if you live in a low risk area — and the Mississippi coast is considered a low-risk area — you can get the maximum amount of flood insurance for about $350 a year. That's not much considering that the average insurance claim for Hurricane Katrina victims was about $95,000.

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Likewise, often people who rent overlook insurance to protect their belongings, but you shouldn't, because it too is relatively inexpensive (generally less than a few hundred dollars a year.) Also, consider umbrella insurance, which is also relatively inexpensive. Umbrella insurance supplements your auto and homeowners (or renters) liability insurance, providing an extra cushion if someone sues you, says Pagliarini. So, say your auto policy covers up to $100,000 in liability. If an accident results in someone suing you for $150,000, that extra money is coming out of your pocket. A million dollar umbrella policy can cost as little as $250 a year.

Finally, take the time to reevaluate your needs every few years. Changes in your personal, family and work lives can dramatically impact your insurance needs. Sitting down with your insurers or agents every three years or so and running through the same kinds of questions addressed in this story will help you make sure that you're in good shape.

Additional reporting: Arielle McGowen

Jean Chatzky is an editor-at-large at Money magazine and serves as AOL's official Money Coach. She is the personal finance editor for NBC's "Today Show" and is also a columnist for Life magazine. She is the author of four books, including "Pay It Down! From Debt to Wealth on $10 a Day" (Portfolio, 2004). To find out more, visit her Web site, www.jeanchatzky.com.

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