Now, I know nobody enjoys talking about insurance. Indeed, it may even feel a little painful for you to see that money coming out of your bank account every month. However, insurance is something you can’t go without. And when the time comes to use it, you’ll be thankful you have it. But what types of insurance do you need?
What is Insurance?
Essentially, insurance is a transfer of risk. For example, let’s say you have a fender-bender on the way to work. If the accident is your fault, you’re liable for the cost of repairs to both vehicles. That’s a fancy way of saying you have to pay up. If you have insurance, they will foot some of the bill.
Common Insurance Terms
With most types of insurance, you have to pay what’s called a deductible. Let’s revisit our fender-bender example and say you have a $500 deductible. This means you pay the first $500 of the cost of repairs, and insurance will cover the rest up to pre-established limits.
Of course, not all kinds of insurances have deductibles. Life insurance and identity theft insurance typically have no deductible. But the ones you’re most likely to use, i.e. auto insurance and health insurance, typically do. That is unless you pay a huge monthly premium!
Speaking of premiums, you might wonder what that means. A premium just means the amount you pay every month to keep the insurance. Insurance companies determine your premium by calculating how likely you are to get into an accident. For example, teenage drivers typically cost more to insure because they tend to have more accidents. Likewise, your life insurance premiums will be higher if you have hobbies like skydiving.
Making a claim is something you hope you never have to do. To put it simply, a claim is when you ask the insurance company to pay you for a covered loss. So, when a strong wind comes through and blows off your shingles, you might be able to submit a claim for the insurance company pay for it.
Why Do I Need Insurance?
As unpleasant as this might sound, I want you to imagine if something catastrophic happens. For example, you might be at fault in a multi-car accident, or a natural disaster might come through your town. In these instances, insurance is kind of like a life jacket.
Without insurance, you might find yourself having to go deeply into debt. And the last thing you want is to find yourself in a less-than-ideal financial situation.
What Types of Insurance Do I Need?
Glad you asked! There are 6 types of insurance you absolutely need. Here they are:
- Health Insurance
- Auto Insurance
- Term Life Insurance
- Homeowners or Renters Insurance
- Long-term Disability Insurance
- Identity Theft Insurance
Additionally, there are two more types of insurance you’ll need, depending on your age and financial situation: long-term care insurance and an umbrella policy. We’ll discuss these as a bonus towards the end of this article.
1. Health Insurance
Believe it or not, medical debt is a leading cause of bankruptcy in the United States. Indeed, a single medical event can cost hundreds of thousands of dollars. Therefore, you need to make sure you protect yourself and your family with medical insurance.
Now, I know what you’re thinking. Medical insurance is ridiculously expensive! But that’s not an excuse. The first place you should look is with your employer. Explore their options and see which plan works best for you. If your employer doesn’t offer health insurance, you can explore options like Healthcare.gov or even a health cost sharing network like Christian Healthcare Ministries.
As you shop around, I recommend taking a good, hard look at high-deductible plans that come with a Health Savings Account (HSA). High-deductible (HDHP) plans tend to be cheaper, and the HSA has some seriously awesome benefits. Here are a few of them:
- You can deduct your contributions from your taxes at the end of the year.
- Your contributions will grow tax-free throughout the year and you can invest the funds however you want.
- You can use the money tax-free on qualified medical expenses.
As you can see, there are some real advantages to the HDHP and HSA combination. It’s what I personally do and I totally recommend it!
2. Auto Insurance
Most likely, you live in a place that requires you to have auto insurance anyway. And it’s no wonder! The average claim in an automobile accident is $6,005! However, there are still some who drive around without insurance. Not only are you breaking the law, but you’re setting yourself up for serious financial troubles.
Fortunately, there are plenty of options for car insurance. Therefore, you can shop around to see if you can get the best rate! Here are some of the things you need to look for:
- Liability Coverage – This will pay for any property damage or medical bills after an accident occurs. However, this only includes damage done to others, not yourself. Most states have a minimum requirement for liability coverage, but it’s usually not enough. Therefore, I recommend getting at least $500,000 in liability coverage
- Collision Coverage – Collision coverage will cover the cost to repair or replace your car in the event of an accident. However, you can drop the collision if you have a good emergency fund or if your car is practically worthless.
- Comprehensive Coverage – This is for anything other than your run-of-the-mill accidents. For example, events such as theft, floods, vandalism, and other acts of God can be included in comprehensive coverage.
Check with a licensed insurance agent to see what kinds of insurance are best for you. But keep in mind that the more coverage you get, the more it will cost.
3. Term Life Insurance
Nobody likes to think about death. However, you need to make sure your family is secure just in case the worst happens. Consider for a moment what would happen if you suddenly died. How would the loss of income affect your spouse? What about your children? Surely the last thing you want them to think about in their grief is how to survive financially. That’s why I recommend term life insurance as one of the foremost types of insurance you need.
To begin, you need at least 10-12 times your annual income in term life insurance. For example, if you make $50,000 a year, that means you’ll need $500,000-600,000 of coverage for term life insurance.
Fortunately, term life insurance is extremely affordable. If you’re young and healthy, you can easily get $500,000 of coverage for twenty years for as little as $25 a month. However, I need to implore you to stay healthy if you want the best rates. Smokers, those who are overweight, and skydivers will find term life insurance less affordable.
But what if you’re single and have no family? Well, you don’t really need life insurance. The only exception would be in you’re in heavy debt. If that’s the case, get enough life insurance just to cover your debts and to pay for a funeral. Otherwise, it’s not a needed expense.
4. Homeowners or Renters Insurance
When mister tornado comes to visit, you’ll be very glad that you have homeowners insurance. If you have a mortgage, they will require you to have homeowners insurance. Even if you don’t have a mortgage, homeowners insurance is a small price to pay for the peace of mind it brings.
You should also consider adding extended dwelling coverage. This helpful add-on will help cover the cost of rebuilding your home above your policy limits.
You should discuss exactly what your policy covers with your agent. This way, you’ll know whether or not the insurance company will foot the bill when sewage starts spewing out of your toilet. Also, you may want to add on earthquake or flood coverage, depending on where you live.
For renters, you’ll need a renters insurance policy. This will cover your stuff in the event your Ramen Noodles catch on fire and burn the apartment down. However you look at it, it’s a good idea to make sure you can replace your belongings in case of disaster.
5. Long-Term Disability Insurance
This is another hard one to think about, but skipping it could be disastrous. According to the CDC, 25% of adults will live with a disability at some point in their lives. My friend, the odds are not in your favor with this one. Therefore, I recommend taking a look at long-term disability coverage.
Long-term disability helps to replace some of your income until you’re able to return to work. Many employers offer long-term disability as a benefit, therefore I recommend you start there. Otherwise, you can look into a few private companies. Again, this is a small price to pay to make sure you protect your family.
6. Identity Theft Insurance
Identity theft is on the rise. And I mean big time. As many as 1 in 10 people become victims of identity theft every year. Once again, the odds are not in your favor! And it’s not only adults who are victims of ID theft. More and more children become victims every year. Imagine turning 18 and discovering you already have a mortgage, credit card, and car loan!
The only identity theft insurance company I recommend is Zander Insurance. At the time of writing this blog, Zander offers ID theft insurance to individuals for only $6.75 a month. Furthermore, you can protect yourself, your spouse, and your children for only $12.90 a month. Best of all, they’ll reimburse you up to $1 million, take over recovery efforts, and proactively monitor your information. Plus, they protect against all types of ID theft. Again, this is a small price to pay for peace of mind.
2 Types of Insurance You Need Later
So far, we’ve covered the types of insurance you need at almost any stage in life. The exception being term life insurance. You only need term life insurance when you have a spouse or dependents who depend on your income. However, there are two more types of insurance you need once you reach a certain age, and once you have a significant net worth.
An umbrella policy is a type of insurance that adds extra layers of liability insurance. You use an umbrella policy to help keep your assets safe in the event of a lawsuit. For example, let’s say you host a party, and your ceiling caves in, which injures several people (for the sake of keeping it G, nobody dies). Your guests might sue you for far more than your current homeowners liability limits. An umbrella policy will help to make up for those extra dollars so that you don’t have to.
Typically, you don’t need umbrella insurance until you have a net worth of at least $500,000. Otherwise, if someone sues over an accident, you could end up having to start all over again. $2-300 a year will easily add an extra $1 million of liability insurance.
Long-Term Care Insurance
You’ve spent you life building up your nest egg to $2 million. Congratulations! Now you retire and dream of what you want to do. But just a short time later, the worst happens. You become chronically ill and your family can’t take care of you. You have no choice but to go into a nursing facility, where you might remain three or four years. That $2 million dollars you saved for your retirement and for your children’s inheritance will disappear rather quickly. However, you had the foresight to purchase long-term care insurance.
This type of insurance comes in handy to those who are getting up there in age. Medicare will not cover nursing home facilities unless you have no savings. Therefore, purchasing this insurance once you turn 60 is important for protecting your nest egg.
I will warn you: this type of insurance is not cheap. And you may not think you need it. However, all of us deteriorate at some point in life. Consider looking into this once you reach 60.
Are There Types of Insurance I Don’t Need?
As a matter of fact, there are several types of insurance you DON’T need! Insurance companies have come up with all kinds of gimmicks designed to scare people. Truthfully, the types of insurance listed above are really the only ones you need. But we’ll cover a few of the insurances that are a waste of money.
Whole Life or Universal Life Insurance
Your life insurance agent will try very hard to sell you on whole life or universal life policies. The selling point for these is that they build up cash value over the course of your life. However, whole life insurance is considerable more expensive and they get a terrible rate of return.
For example, you might spend $10 a month for a $100,000 20-year term life insurance policy. The same coverage will cost you $120 a month with a whole life policy. The real kicker is that your family only ever gets the $100,000. But what about that cash you built up? Well, the insurance company gets to keep that. Bummer.
Your much better off investing that money in good mutual funds. You’ll get a better rate of return and your family will get to keep it if you die.
Accidental Death and Dismemberment Insurance
This morbid-sounding insurance is completely pointless if you already have life insurance and long-term disability insurance. It’s just a gimmick add-on for insurance companies to make an extra buck or two.
Short-term Disability Insurance
If your workplace gives it to you for free, then by all means take it. Otherwise, if you have a good emergency fund in place, then you don’t really need it. However, if your workplace doesn’t offer maternity leave, it might be a good idea to have this in case of a pregnancy. But you don’t need it otherwise.
This is another pointless add-on. It will cover you if you die from cancer. But the reality is any number of things in this world that can kill you. Why put all your eggs in the cancer basket? Just get more term life insurance and that will be enough.
Of Course, There are More!
I could go on and on. Credit card insurance, extended warranties, flight insurance, and more. Just do your due diligence and do some research before you purchase any insurance policy.
Add Insurance to Your Plan: Where to Begin
While no one likes to throw money away at insurance, it’s necessary for protecting your assets and your wealth. Since insurance costs so much money, it’s important to shop around to make sure you get the best deals. Instead of going to individual insurance companies, I recommend using a broker like Zander Insurance. You can also use one of Dave Ramsey’s Endorsed Local Providers to shop around for you.
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