Know the types of insurance you need—and those you don't
Insurance is one of those expenses that can seem like a complete waste—until you need it. Then it can be the best money you ever spent. In fact, the right type of insurance is a key part of your overall financial security. There are certain areas you just can't afford to ignore.
Of course, not everyone needs the same coverage—to a large extent it depends on your personal and financial situation. Here are important areas to review to make certain you're adequately covered.
Insurance you must have
With soaring healthcare costs, a serious injury or surgery that might require a hospital stay can set you back thousands of dollars. That's why it's essential to buy insurance before you actually need it. Insurance won't cover medical problems or conditions that started before you purchased the policy. If you don't have the health insurance you need, start by reviewing these different types of policies to determine the right choice for you:
If you don't have adequate medical coverage through your employer or another group, you need to consider your options. Possible alternatives include:
- A low-cost, high-deductible policy to cover major expenses.
- Coverage available at a lower group cost through a professional, educational or religious organization you belong to Student health insurance through a university or community college.
Most states require you to carry at least basic liability insurance to cover damage you may do to others, including both bodily injury and property damage. Liability insurance also pays for potential legal bills. You can also choose to expand your coverage to pay for a variety of other possible costs like damage to your car in case of a collision, vandalism or fire, of if your car is stolen. First-time car buyer? Learn more about auto insurance.
Insurance well worth considering
This type of insurance protects your earning power. Many employers offer some type of disability insurance, often covering about 60 percent of your salary. A few states offer short-term disability insurance. The Social Security Administration also offers limited disability coverage. Look into your current coverage. If you can't survive a work disruption, learn more about what a private disability policy offers.
Not everyone needs life insurance. The important thing is to make sure you have it if you need it—and have the right type to suit your needs. There are two basic types of life insurance:
- Term life, purchased for a fixed number of years, is an inexpensive option if you have kids or other loved ones who are dependent on your earnings. It can replace your income in the event of your death. It can also make sense if you know there's a big expense ahead, say college tuition, that you want to make sure is covered.
- Permanent life (also called Cash Value) provides coverage for an indefinite length of time or for the life of the insured, and features an investment, or "cash value," component. If a person purchases the policy at a relatively young age, the premiums will be higher than for a comparable amount of term insurance. This is because a percentage of each premium goes into an account managed by the insurance company, called the cash value account, where it is designed to grow tax-deferred.
If you own your own home, you want to make sure you have adequate coverage to protect both your dwelling and your possessions. Depending on where you live, you may want to add on earthquake or hurricane insurance for good measure.
Your landlord's policy will only cover damage to the dwelling, not to your possessions. A renter's policy usually covers events such as fire, theft and vandalism and may protect you from damage due to things like faulty wiring, water or weather. Get more information about insurance for first-time renters.
For extra protection, you might also consider an umbrella policy. This provides coverage above and beyond your car or homeowner's insurance in the event that you might be sued for an injury caused by you or your property. Umbrella policies are generally reasonably priced and can be smart coverage, especially for high-net-worth individuals. You can often get up to a million dollars in coverage for a couple hundred dollars a year.
The U.S. Department of Health and Human Services estimates that at least 70 percent of people over 65 will require some type of long-term care services at some point. Long-term care insurance isn't cheap, and premiums and benefits vary widely. But whether you're concerned for yourself or aging family members, think about how the cost of care vs. insurance would affect your overall financial health.
You'll find more detailed information and answers to commonly asked insurance questions at the Insurance Information Institute.
Our Two Cents
Certain insurance types are usually just a waste of money. For instance, if your mortgage is below 80 percent of the cost of your home, you probably don't need private mortgage insurance. Here are other types of insurance that are generally unnecessary:
- Life insurance for kids— Remember, life insurance is for those who have dependents.
- Car rental insurance— This is usually covered by your own auto insurance and by some credit cards.
- Pet insurance— Premiums can often be larger than average pet care costs.
- Flight insurance— If you have adequate health and life insurance, that's probably sufficient.
- Wedding insurance, cancer insurance, mortgage life insurance— All are types you can safely avoid.