Insurance Described As A Financial Necessity

INSURANCE, says retirement expert Steven Vernon, is misunderstood.

''Insurance is as much a part of a person's investment-retirement plan as taking out an Individual Retirement Account, buying stocks, or purchasing an annuity,'' he says. That's because a major uninsured loss, were it to occur, could wipe out one's entire savings plan and leave a person vulnerable to financial adversity in retirement.

Millions of Americans are drastically underinsured -- or have little working knowledge of what coverage they should carry, says Mr. Vernon, an actuary and author of several books on financial planning. He works for the Wyatt Company, a compensation and employee-benefits consulting firm in Washington.

One of Vernon's pet concerns is that too many people take out ''whole life'' insurance instead of cheaper ''term life'' insurance. Another is that people often buy life insurance that is backed by the ''general account of the life insurance company, instead of a designated account.''

If the insurance company were to have financial difficulties, as several major insurers did in recent years, a beneficiary or insured party being paid out of a general fund ''would have no more claim to that insurance money than any other creditor of the firm,'' Vernon says. In the case of a designated account, the insurance company would have set aside assets to satisfy all claims on that account.

How does a person find out whether their policy is insured through a general account or a designated account?

''Ask the company,'' says Vernon.

Insurance comes in three basic categories:

1. Property-casualty insurance, which covers your house and its contents, or, if renting, your personal contents in an apartment; also, your car, boat, airplane or other major valuables.

2. Life insurance, including either whole life, which allows a person to build up cash value in a policy, or term life, which will only pay out the guaranteed benefit during a set period of time, without acquiring cash value.

3. Health and disability insurance, including policies that cover medical or nonmedical treatment, hospitals, nursing homes and sanitariums, plus policies covering possible disabilities. This topic will be discussed in greater detail in a subsequent article.

Currently, almost all licensed drivers carry automobile liability insurance since it (or having adequate noninsurance financial resources), is required by law in all states. About 95 percent of the nation's adult homeowners have homeowner's insurance, according to the Insurance Information Institute (III), in New York. But only 41 percent of all renters have renter's insurance.

A solid majority of heads of households are covered by life insurance, either through personal or company plans; about 366 million insurance policies were in effect at the end of 1994, with policies having a total valuation of $12 trillion, according to the American Council of Life Insurance (ACLI) in Washington.

But many Americans do not carry life insurance, especially older people who do not want to pay high premium costs; part-time or seasonal workers; young adults, such as college students; and nonworking women.

Women in general tend to be underinsured, experts say.

''Life insurance is a very personal product and can be tailored to any person's specific need,'' says Kenneth Vest, an official of the ACLI. Of the two types of life insurance, whole life (often called ordinary life, universal life, adjustable life, and variable life) has a cash value, which allows insured persons to borrow against it, to use the ''equity'' paid into the policy to keep the coverage if they lose a job or cannot make insurance payments, and provides a specified amount in cash at the end of the policy period.

Term life, which pays on the death of the named beneficiary of a policy only during a specified time period, has no cash value and cannot be borrowed against. Although Vernon favors term life, insurance agents often prefer to sell whole life, holding that it is like having an additional credit line for families.

Renters should ''definitely acquire household insurance,'' says Jeanne Salvatore, an official of the III. For all persons, small, expensive electronic items, such as electronic note pads or personal computers, as well as other specialty items such as cameras, furs, coins, or other collections, should be insured with a ''floater'' or ''endorsement'' to a regular policy, she says. Regular policies usually have a deductible amount or carry limitations on payouts for big ticket items.

People in the public eye, or who have sizable financial assets, she says, should consider buying an inexpensive umbrella liability policy in case someone sues them and wins. (A homeowner or auto policy may provide such coverage.) And people who own boats, aircraft, or antique cars should carry a separate policy.

A ''national insurance consumer hotline'' for questions on life, health, and property-casualty insurance can be reached by calling 1-800-942-4242. Free pamphlets, including ''What You Should Know About Buying Life Insurance,'' ''Nine Ways to Save On Your Auto Insurance,'' and ''Twelve Ways to Save on Your Homeowner's Policy,'' are available through the hotline.