What Kind of Insurance Do You Need?
Find out the 5 types of insurance you really need and how much is enough.
This article is the fourth in our five-part series about taking charge of your finances. Today’s post is about insurance—which types to have and how much coverage is necessary to keep you protected.
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Why You Need Insurance
Without adequate insurance, everything that we’ve talked about in the prior three posts—setting goals, saving, and investing—could all be destroyed.
I really hate to sound like a doomsayer, but a catastrophic event like a health problem, a car accident, or a death in your family could wipe out everything you’ve worked so hard to earn.
It’s not pleasant to think about what bad things could happen, and maybe that’s why so many people are underinsured. But managing different types of risk is easy, in a financial sense, because most of them can be passed on to a third party, like a health or life insurance company.
Having enough of the right kinds of insurance allows you to protect yourself and those you love from something unexpected jeopardizing your financial security and happiness.
What Kinds of Insurance Do You Need?
There are endless types of insurance, from policies that protect airplanes to those that cover websites. But I’m going to focus on the five types that are most important for individuals and families:
Type #1: Health Insurance
Health insurance is the most important insurance to have. Without it you risk being stuck with a large bill if you have any kind of medical issue from the flu to a broken bone. Even a quick emergency room visit or a basic hospital bill can cost thousands of dollars.
Having enough of the right kinds of insurance allows you to protect yourself and those you love from something unexpected jeopardizing your financial security and happiness.
Starting in 2014, the Affordable Care Act (also known as Obamacare) requires just about every American to have health insurance, or pay a penalty. If you can’t get affordable health coverage at work, or if you’re self-employed or unemployed, you can purchase a policy through your state’s health insurance marketplace or a qualified insurance broker.
See also: What Is Obamacare? 8 Facts You Should Know
Depending on your income and family size, you may be eligible for a government assistance that will reduce the cost. Also note that health care reform prohibits insurers from denying you coverage or raising rates if you have a pre-existing medical condition.
Insurancequotes.com has an Obamacare Eligibility Calculator that shows your eligibility for all subsidized health insurance benefits, including Obamacare, Medicaid, Medicare, and the Children’s Health Insurance Program (CHIP).
Type #2: Disability Insurance
Disability insurance provides a percentage of replacement income if you’re unable to work due to a disability, illness, or accident.
Remember that health insurance only addresses your medical bills; it doesn’t pay your living expenses, like housing or food, if you can’t earn money for an extended period of time. According to information on insure.com, you have a one in five chance of becoming disabled during your working years. You’re more likely to suffer a disability than you are to die before the age of 65!
And when a long-term disability occurs, the average absence from work is 2½ years. That could cause a major financial strain for you or family members who depend on your income. Social Security is only available after you’ve been out of work for a year and are completely disabled. Worker’s compensation insurance is only for work-related injuries.
If you don’t have the option to purchase a disability policy at work, (or if you do but it’s not sufficient), purchase a private policy for yourself and have enough emergency money set aside to tide you over until coverage begins.
Type #3: Life Insurance
Life insurance is critical when your death would create a financial hardship for those you leave behind, such as a spouse or children. If you’re single, or no one depends on your income, you either need a very small policy for your funeral expenses or none at all.
If you have a stay-at-home spouse who cares for your children, you probably also need a small policy on their life to cover future child care costs. You should never buy life insurance on children, because they’re the ones meant to benefit from insurance proceeds.
There are two basic kinds of life insurance—term and permanent:
- Term life insurance provides a benefit upon the death of the policy owner for a set period of time such as 10 or 20 years. I prefer term insurance because it’s inexpensive and gives you the most benefit for the dollar.
- Permanent life insurance includes a variety of products such as whole life, universal life, and variable life. I won’t get into the details on each of those, but they provide a death benefit and an investment all wrapped up in one. They’re also called permanent life policies because you get lifetime coverage.
A basic rule of thumb is to purchase a policy that’s at least 10 times your income. So if you make $50,000, you might need a policy that would pay your beneficiary $500,000. But factors like the number of children you have, education expenses, mortgage payments, and the lifetime income needs of a surviving partner or spouse should come into play.
See also: 5 Facts To Know About Term Life Insurance
If you don’t have life insurance though work, or if you do but it isn’t enough, figure out how much you need. A great place to start is the How Much Insurance Do I Need? Calculator at Bankrate.com.
Type #4: Auto Insurance
Auto insurance is required by most states. It’s a collection of policies that protect you against financial loss in 3 major ways:
- Property coverage pays for damage to your car. A comprehensive portion pays for damage that wasn’t the result of an accident, like for vandalism, storm damage, or theft. And there’s a collision portion that covers damage that was the result of an accident.
- Liability coverage pays for your legal obligations to others for damaging their property or harming them in an accident.
- Medical coverage pays for the cost of treating accident injuries, and sometimes for lost wages and funeral expenses.
Every driver should have liability and medical coverage; however, you may not need comprehensive or collision depending on the age and condition of your vehicle. For an older car, it may not be worth it.
You should have enough auto insurance to cover the total value of your all assets—such as your home, vehicles, savings accounts, and non-retirement investments—if you were involved in a lawsuit.
See also: What You Should Know About Credit-Based Insurance Scores
Rates vary depending on factors like your driving record, vehicle, and credit (in most states). Choosing a higher deductible will lower your monthly premium. You can shop auto insurance at sites like carinsuracequotes.com and insureme.com.
Type #5: Homeowners Insurance
Homeowners insurance is important to protect the replacement value of your home and its contents. It’s a requirement when you have a mortgage.
Basic home insurance pays for claims when a natural disaster, such as a fire, tornado, or hail storm, damages your property. Your possessions, like furnishings, clothes, and jewelry, are generally covered up to certain limits.
There’s also a liability portion that covers you if someone gets hurt while they’re on your property.
Renters also need renters insurance to cover their belongings in the event of a natural disaster or theft, for instance. You can compare rates for home or renters policies at sites like insurancequotes.com or insweb.com.
See also: Your Guide to Renters Insurance
You work hard to build wealth and have a comfortable life, so remember to protect it by reviewing your insurance needs each year.
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.
