We need to financially protect ourselves from events that happen out of our control. You can’t predict everything, but you can shield your income, property, and possessions from the possibility of financial losses resulting in disabilities, injuries, and liabilities. Unforeseen circumstances like accidents, natural disasters, illness, fires, or even death may present risks to our assets and families.
Table of Contents
Types of Insurance You Need:
- Long Term Care
- Health Insurance
“Insurance is the only product in the world that both the seller and buyer hope it is never actually used.”
Buying insurance is the best way to manage the risk of losses that could be financially catastrophic to you. There are eight types of insurance you need. Nowadays, there are insurance products for just about everything. Just health insurance alone amounts to 4.3% of our pre-tax income in 2019.
Discussing insurance products are often uncomfortable. It requires us to think about probabilities with dire consequences. However, ignoring the topic could leave you exposed to avoidable losses. First, let’s explain some terminology used by the insurance field.
A Few Simple Terms To Know:
What is Insurance
Insurance is a way to have protection from financial losses. That coverage provides a guarantee of compensation for individuals in return for a payment of a premium.
Premium is the monthly or annual cost for insurance coverage.
An insurance policy is a contract between the person buying insurance (the insured) and the insurance company (the insurer) sold by insurance agents.
The deductibles are the specified money amount the insured must pay before an insurance company pays a claim.
Your policy may not cover everything and may exclude that loss or damage.
An insurance limit is the maximum amount of money an insurer will pay toward a claim if the policy covers it.
8 Types of Insurance Your Household Needs:
1. Auto Insurance
Driving a car is the single most extensive exposure to catastrophic losses for Americans. Poor driving judgment or adverse weather can result in significant property damage, personal injury losses, and death. It is illegal to operate a vehicle without assuming financial responsibility. Our 17-year-old son with excellent grades passed his road test this week. The first thing we did was add him to our policy, a $2,000 annual hit just like that. Hoorah!
Nearly every state requires motorists to have car insurance. The rules vary in the minimum amounts that are needed. New Hampshire is the only state that doesn’t mandate drivers to carry car insurance. That said, motorists are still responsible for paying bodily injury and property damages if they cause the accident.
Still, one out of six drivers is uninsured in the US. Those uninsured are either refusing to buy insurance or cannot afford it. If caught without coverage, drivers may be subject to fines, suspension, or points on their licenses.
Given these stats, you may want to consider uninsured motorist insurance coverage that will pay for your expenses after an accident caused by a driver who doesn’t have any insurance. This insurance is inexpensive but will be beneficial for repairs and if you have serious injuries. It will cover long-term care that can quite expensive. You need to get the right car insurance.
The Insurance Information Institute reports in 2017 that the average loss per claim on cars is:
- Physical damage per claim, on average, is $3,425 for collision and comprehensive losses.
- Liabilities for bodily damage are $15,270 and $3,638 for property damage.
Car insurance combines the liability and property coverage needed by owners and drivers into a single package. Liability insurance covers the insured if found responsible for losses–bodily injury and property damage– suffered by others.
Medical payments insurance, also known as personal injury protection, can help pay medical expenses regardless of who is at fault. This insurance covers you, your passengers, any family members driving or riding in the insured vehicle at the time of the accident.
Some states require uninsured or under-insured motorist insurance for those injured in an accident caused by a driver with no or insufficient auto liability insurance.
Collision or physical damage insurance protects against losses caused by damages to the car. This insurance kicks in whether the vehicle is repairable or replaced.
Comprehensive coverage covers losses caused by accident but through theft, vandalism, fire, or flood.
2. Homeowner’s Insurance
Your home is usually your most significant asset. Here is where our families live and spend precious time with our children and pets. We depend on and seek sustenance, privacy, and security in our homes. The shelter is among life’s most essential needs. When your home is damaged, repairs are usually costly and may be rendered uninhabitable.
Whether you own or rent your home, you face the risk of suffering property damage and liability losses. Homeowner’s insurance will combine the property and liability coverage into a single policy.
Property damage should cover damage to the dwelling, other structures on the property, damage to dwelling contents, including personal property, and expenses caused by having to live elsewhere if the home is not livable. Your property coverage should be at least 80% of your home’s replacement value. This estimate is the industry standard.
Personal Property Damage
Property or dwelling coverage doesn’t cover your personal property. To determine coverage for personal property, itemize your inventory of furniture, appliances, and furnishings by the purchase price, cash value, and replacement cost.
Your coverage is 50%-70% of the actual contents and personal property value in your home.
Liabilities To Others
Liability losses occur when the homeowners are negligent or fail to exercise due caution in protecting visitors to their home. For example, if you forget that you left the oven door open, you may be liable for the burn sustained by your friend’s child. Liability coverage provides help for our responsibilities to others.
3. Renter’s insurance
You should buy renter’s insurance when renting from homeowners. The homeowner is your landlord and likely has insurance for the dwelling and furnishings if provided as part of your lease agreement. However, their coverage does not protect your possessions.
Three Coverage Benefits:
- The renters’ policy will cover a tenant’s personal property if it is damaged, destroyed, or stolen in the event of fire or theft.
- Another benefit is the liability coverage it provides for medical bills, damages, and legal defense costs from injuries caused by you, another family member, or a pet.
- Finally, your policy should cover temporary living expenses if your place is so damaged it is uninhabitable. Most policies will help you with hotel bills and meals.
Therefore, renters insurance is needed and is generally affordable.
4. Life Insurance
Life insurance is protection for families that are fully or partially dependent on your income. If a working parent passes away, their income is lost. Parents or single parents with young children need life insurance protection to help replace that lost income. Your dependents usually mean your spouse, children, and extended family members like aged parents.
Some employers may provide life insurance as a perk but usually smaller amounts as a “starter” policy for employees to add more coverage.
Your coverage is often associated with your lifestyle needs. You want to cover your families’ living expenses and financial commitments required for the mortgage, car, and expenditures for college tuition for your children. Simplistically, insurance agents often refer to a rule of thumb that you use a multiple of 10 times your income.
There are two main life insurance policies: term life and whole or cash value life insurance. Term life insurance is cheaper but expires at some point. I recommend that you consider combining both term and whole life policies for full coverage. Many families buy term life because it is more affordable but prefer whole life for its more permanent coverage.
When you have a life insurance policy, make sure to designate your beneficiaries. Review and make changes to your designations when life changes occur.
5. Disability Insurance
According to Healthcare.gov, a disability is a limit in a range of major life activities. Impaired activities include seeing, hearing, and walking. It also encompasses tasks like thinking and working. Humans are potentially frail. That is why they invented disability insurance. Accidents or illnesses can happen to just about anyone at any time. More than one in four of today’s 20-year-olds will become disabled by retirement age.
That statistic should be cause for concern. Disability insurance replaces a portion of your earnings when you cannot work due to illness or injury. This insurance is a valuable perk if offered by your employer. You must opt-in before becoming disabled to be covered.
In 2018, 42% of private industry workers had access to short-term plans, while 34% had access to long-term plans. When private employers offer disability insurance to employees, they pay the full cost of short-term coverage for 85% of plans and 94% of long-term plans.
The two forms of disability insurance are:
Short-term plans typically last between 3-6 months, although it could go as long as two years. Employers may partially pay for the short-term plan. Coverage kicks in between 1-14 days after the employees are unable to work. You can skip this policy if you have an emergency fund that may pay for essential living costs like your mortgage, rent, and car bills for six months.
Long-term plans provide coverage of five years or more. This insurance will pay a percentage of your salary, usually 50%-60, depending on your policy. Usually, the employee must pay the premium for such coverage if they are opting-in to the policy. If your employer is offering disability at a group rate, it will likely be less expensive than purchasing a plan on your own.
A disability may result in the primary breadwinner being unable to work for a significant period of years. This event could be a considerable hardship without disability insurance. The average long-term disability claim lasts 34.6 months. Few Americans have enough cash flow to cover income during that length of time.
6. Long Term Care Insurance
Long-term care insurance is a very long-term contract. It provides reimbursements for custodial care costs in a nursing facility, assisted living, or at home. You would usually buy a policy in your 50s and up when you are in good health.
You may qualify to receive Medicaid reimbursements for custodial nursing home care if you have spent down most of your assets. That means you have to show you are medically needy to get home care assistance from Medicaid. On the other hand, the wealthy have enough assets to pay for long-term care. The middle class is most in need of long-term care to protect their savings and have better quality care.
Skilled nursing care is expensive for those requiring 24 hours per day supervision. The average yearly cost in 2017 for these services in a semi-private room was $85,776.
The services provided by this kind of insurance are those not covered by regular health insurance or Medicare. Reasons for long-term care are those needing extended care. This type of care helps with daily living activities: eating, dressing, grooming, bathing, and caring for severe cognitive impairment.
Long-term care insurance has its fans and foes — and for a good reason. Policies can be expensive, especially if you purchase coverage when you’re older and still healthy. It is difficult to know how much coverage you’ll need, let alone if you’ll need it at all.
Some employers may offer long-term care insurance for their employees at a group rate. If you’re planning to self-insure, it may be a good idea to work with a financial planner who can help you evaluate your coverage needs.
7. Health Insurance
According to an HFF report, less than 90% of the US population had health insurance in 2019, below 2017’s level. That level may fall further with people losing their insurance due to pandemic-related high job losses in 2020.
Even if you have an employer-sponsored plan, health care insurance is expensive because certain costs are not covered.
What are the costs of a health insurance plan? Review your plan carefully for these features:
- Know what the premiums are or the amount you pay per month.
- Exclusions that are typically not covered in your policy.
- Annual deductibles are required to pay the initial portion of medical expenses.
- Co-payments, or co-pays, require you to pay a certain dollar amount each time you have a specific covered expense item. Co-pays are for doctor visits and prescriptions.
- The out-of-pocket maximum is the most you will pay in a policy period (typically a year) before the insurer pays 100% of your covered costs.
The Dangers Of Medical Debt
Even if you have health insurance, you may still have responsibilities for some medical costs. The Kaiser Family Foundation/ New York Times survey found that 26% of Americans have problems paying medical bills.
Medical debt left unpaid will eventually end up as a hit to your credit report. Try to negotiate it with your vendor if you are facing financial problems. Often, you may find out that the insurance only partially covered your bill. It is your responsibility to determine those facts as they could be as harmful to your credit score as defaulting on your credit cards.
Bankruptcies resulting from unpaid medical bills make healthcare the number one cause of those filing or more than 66% of the total. If you’re uninsured or underinsured, you may be exposing yourself and your family to potential financial catastrophe. One unexpected major medical emergency or adverse diagnosis could amount to hundreds of thousands of dollars of expenses.
My college students often tell me that they do not have health insurance because they are healthy. That may be so for that point in time, but one major medical problem could be devastating costs. Medical insurance is expensive. Some part-time jobs may offer some coverage.
Health Savings Accounts (HSAs)
If you have high-deductible health insurance plans, it may allow you to open a Health Savings Account (HSA). The HSA may pay for current or future healthcare expenses out of your savings.
An HSA is a unique tax-advantaged account that provides for qualified medical cost reimbursements. The money you contributed to your account reduces your taxable income that year. Your HSA account continues to grow annually unless you withdraw money.
There are annual contribution caps of $3,600 for singles and $7,200 for families in 2021. With a high-deductible plan, the insured is responsible for more of the up-front healthcare costs, but you’ll pay a lower monthly premium.
8. Umbrella Insurance
Umbrella insurance is a tremendous and essential policy to have. It is also known as excess liability insurance. This policy extends the basic liability coverage provided in different policies, including home, auto, boat, and tenant. It offers broad range to protect your assets and future earnings from lawsuits. By buying this policy, you are adding to the liability protection you have already purchased.
For example, if you have $800,000 in assets, you can buy a $1 million umbrella liability policy to add to the $200,000 liability insurance you have on your home and car. This coverage closes a critical gap.
Policy limits are $1 million to $5 million. A $1 million umbrella policy costs about $200-$300 per year. This cost is a small cost for significant protection. Over 75% of umbrella losses are auto-related.
Buying insurance is not exciting but is essential. Not having coverage may have financial consequences that could be catastrophic for you and your family. Insurance is a competitive industry, so do comparison shopping.
Review your workplace benefits plan to identify what they may provide on a group basis. Supplement what your employer has provided, but you would likely be paying a reduced price compared to individual plans.
Thank you for reading! What kind of insurance do you think is most important? Not necessary? Please share with us. We would like to hear from you!
With a passion for investing and personal finance, I began The Cents of Money to help and teach others. My experience as an equity analyst, professor, and mom provide me with unique insights about money and wealth creation and a desire to share with you.