Back to Basics: What Types of Insurance Should I Have?
Insurance is ubiquitous. You can insure just about anything these days — and it can be expensive! But which types of insurance do you actually need? Let me break it down from most important to least important. I’ll also explain why you should have each and when it’s okay to manage the risk on your own and go without coverage.
What’s your most important asset? While you might say, “My house” or “My car,” it’s probably your ability to work and earn a living. That’s why this type of insurance is the first on my list. Simply put, disability insurance protects your income. If you weren’t able to work for the rest of your life, you’d miss out on a heck of a lot of earning potential.
That makes disability insurance more important the younger you are. As you get closer to retirement or financial independence and don’t have as many years of earning ahead of you, disability insurance becomes less useful. It’s simply because you have fewer years of income to protect. That said, you can consider dropping disability insurance when you’re on the cusp of retiring or reaching financial independence, but only if it no longer makes financial sense to pay the premiums compared to the benefit you’d receive if you became disabled.
You may also consider dropping your disability insurance coverage once you’ve stashed enough savings away to retire. Look at it this way: If you lost your ability to work tomorrow but would have no trouble living on your savings, you probably don’t need to pay for disability insurance.
The convergence of disability insurance no longer being worthwhile to pay for and an individual having enough to support themself if they were no longer working tends to happen when retirement or financial independence is on the horizon. So if you’re at the beginning, middle, or even three-quarters of the way through your working years and aren’t otherwise wealthy enough to stop working, you should probably have this coverage. And if your employer offers it to you free of charge as part of your employee benefits package, you should definitely take the free coverage!
Health insurance gets the second spot on my list because of how expensive medical care is. Maybe you even thought of “My health” when I mentioned your most important asset earlier. In addition to protecting your health and well-being through regular care, medical insurance protects insured folks against extreme expenses. It limits the amount you pay “out of pocket” to a certain number of dollars per year.
This helps you avoid medical bankruptcy. You may not have your own medical insurance until age 26, and you’ll likely move to Medicare coverage at age 65, but this is one type of insurance you should never go without at any point in your lifetime.
3. Property and Casualty
Next up is protecting your stuff. Remember when I mentioned your biggest asset? If you’re a homeowner, your home is certainly one of them! Many people owe debt on their homes for 30 years due to the commonality of the 30-year mortgage. Imagine not having homeowners insurance — one type of policy that falls into the property and casualty group — and having your home be a total loss. You’d still be on the hook for those mortgage payments, and you’d have to find another place to live, which would likely mean paying another set of mortgage payments or rent.
Because homeowners and renters policies both include liability insurance, it’s important to have the right type of coverage for your living situation. The same is true for your auto insurance. And when your net worth starts to increase beyond the liability limits that home and auto insurance offer (usually around $500,000), it becomes time to seek out an umbrella insurance policy.
In general, you should never go without property and casualty coverage. Even if you could buy a new home or car outright if yours was a partial or total loss, you probably want to keep your home and auto insurance for the liability protection if offers.
Nobody lives forever, so what’s the point of life insurance? In case of premature death, it acts as your income replacement for people who depend on you. That said, if you’re a single individual with no kids and no other folks who rely on your income, you probably don’t need it.
If, however, you have children, have a spouse or partner with whom you pay a mortgage or other loan payment, or your spouse or partner doens’t work and you support them, you just might need life insurance. If you were to pass away unexpectedly, life insurance benefits could pay for your child’s care or college. Your spouse or partner could use a life insurance benefit to pay off your portion of a loan so they continue to be responsible for only their own portion. And a spouse or partner without income could rely on a life insurance policy’s proceeds to get by for life or until they could find employment.
The amounts necessary to provide for a partner or spouse’s lifestyle indefinitely, cover expenses for raising a young child and sending them to university, or pay off half or more of a recently lended mortgage could be quite high. That would mean quite a bit of life insurance would be necessary to cover them. And in smaller amounts — like the $50,000 your employer may provide to you at no cost — may be sufficient for a spouse or partner to take some time off of work to grieve your unexpected death and adjust to life without you.
Like disability insurance, those with assets that could cover the loss of an individual’s income and its impact on a life or family members’ lives might not need insurance. Then again, it’s usually a bad idea to turn down an employer-paid benefit … but it’s almost always a bad idea to pay for something you don’t need.
5. Long-Term Care
This last one on my list can be tricky. That’s because, while long-term care (LTC) itself is expensive … so are LTC insurance policies. Most of the others I’ve covered here come with a fairly low premium expense that could save a policyholder from financial ruin. While LTC insurance is still relatively inexpensive compared to the cost of care, it also comes with its fair share of the unknown.
That’s because you could pay high LTC insurance premiums for years … and never benefit from insurance dollars paying for your care if you don’t have an LTC need. Hybrid policies that pay a death benefit for any dollars not used for LTC can soften the harshness of that reality, but the coverage can still be expensive.
Because of the cost, the only option for many people is to self-insure. That tends to come in one of two ways. For one, people with an LTC need but no LTC insurance can spend down the assets they have until they’re impoverished enough to qualify for Medicaid. In scenario two, people with an LTC need but no LTC insurance have enough assets on hand to pay for the LTC they need. This often involves selling their homes to finance their care.
For those who have specific estate planning goals for their homes in particular, like those who wish to pass on their real property to family members or friends at their deaths, it may be worthwhile to spend other assets on LTC insurance. In fact, due to the prevalence and expense of LTC needs, many states are requiring residents to obtain some form of LTC insurance or to pay into state-run plans to assist with these expenses.
If you’re considering adjusting your current coverage or adding a new policy to your insurance lineup, you’re in luck! November is insurance planning month, and you can schedule your consultation here. From finding the right amount of life insurance coverage for you to comparing health care options for your family during open enrollment and deciding whether to select that long-term disability insurance buy-up (which is usually a good idea) or working through other insurance types, I’m happy to help. I look forward to seeing you this month for your insurance planning consultation!
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