Insurance is ubiquitous. You can insure just about anything these days — and it can be expensive! You’ve probably asked yourself: What insurance do I actually need? Do I need life insurance? Do I need disability insurance? I know I need health insurance, but what if my employer doesn’t offer the others? 

Insurance planning is an integral part of a comprehensive financial plan, so it’s important to understand the types of insurance coverage and when you need them. Let me break it down from most 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. 

1. Medical or Health Insurance

What’s your most important asset? While you might say, “My house” or “My car,” it’s probably being healthy enough to work and earn a living. That’s exactly why health insurance gets the top spot on my list. Another reason why it’s number-one: because of how expensive medical care is. 

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. No matter what type, this is one kind of insurance you should never go without at any point in your lifetime. 

Read more on health insurance and medical expenses:

• Open Enrollment: How to Compare Health Insurance Plans
• Beyond the Basics: Flexible Spending Accounts (FSAs)
• Benefits of Health Savings Accounts

2. Disability Insurance

After being healthy enough to work, your ability to earn a living is very likely your next most important asset. That’s why disability insurance is next on my list. Simply put, disability insurance protects your income, which is why I often refer to it as income insurance. 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 because you have fewer years of income to protect. Plus, at that point, most of your earning years are behind you, and you’ve likely built up quite a bit in the way of assets. That said, you can consider dropping disability insurance when you’re on the cusp of retiring or reaching financial independence. Still, it’s only a strong decision if you don’t need additional years of income to retire. Another sign: 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 or more 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!

Even if you have disability coverage through your employer, it likely only covers a certain amount of your income, like 60 or 70 percent of your base earnings. It might also have a “cap,” only providing income up to a certain amount monthly. If the maximum amount of coverage available to you through your employer simply isn’t enough, you might apply for an individual disability insurance policy to stack on top.

3. Property and Casualty Insurance

Next up is protecting your stuff. Remember when I mentioned your biggest asset? If you’re a homeowner, your home is probably 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 experiencing a total loss of your home due to a fire. You’d still be on the hook for those mortgage payments and you’d have to find another place to live. Unless you’re able to move in with family or friends, that 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 it offers.

Read more related to Property and Casualty Insurance:

• Beyond the Basics: Quoting and Comparing Home and Auto Insurance
• Colorado Wildfires: Homeowners Insurance Planning for Safety & Protection

4. Life Insurance

Nobody lives forever, so what’s the point of life insurance? In the case of premature death, it acts as a debt payment or income replacement for people who depend on you. That said, if you’re a debt-free 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, a spouse or partner with whom you pay a mortgage or other loan payment, or your spouse or partner doesn’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 while 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 child and sending them to university, or pay off half or more of a fresh 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 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. 

Read more related to Life Insurance:

• Navigating the Financial Impacts of Losing a Loved One

5. Long-Term Care Insurance

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 traditional 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 prohibitively expensive for many.

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. I’ve seen more of our clients lean this way recently, especially when they realize that any children they have will probably be grown and in their own homes by that time. Further, they find that they themselves will no longer need their homes when they require the specialized care of providers in an LTC facility. 

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 require 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! May 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!