Insurance is an interesting industry. It is there to protect you, but it sometimes seems like a huge waste of resources if you don’t end up needing it. Of course, if you do end up with a serious problem, not having insurance could take an already difficult situation and turn it into a financial catastrophe.
While you don’t need to insure against everything, there are a few insurance policies that you should have. The key is to recognize which insurance policies are the most essential to protecting yourself, and find a way to incorporate them into your budget. Not doing so is a gamble which can have a devastating financial impact if something happens.
5 Types of Insurance Policies You Need
These are the types of insurance you need to insure against the largest threats to your budget in the event of an unexpected disaster:
1. Auto Insurance
If you have a car, you need auto insurance – and not only because every state law requires that you carry it. For many people, their car is their only way to get to work; if it becomes un-drivable due to an accident, and the money isn’t available to buy a new one, it can be hard to earn a living.
Additionally, if you are at fault in an accident, the liability you have could become very expensive. Your auto insurance policy may pay medical bills and property damage so that you wouldn’t be forced to come up with the money out of pocket, possibly resulting in financial ruin.
2. Health Insurance
If you are uninsured, you may be one hospital stay away from bankruptcy. Health insurance will help you offset some of the rising costs of health care – at least when it comes to large health needs. If you have a chronic condition, health insurance can help you better afford the care you need.
Even if you are in good health, and rarely use health care services, it can be a good idea to at least have a policy that covers major medical problems, just in case an accident befalls you.
3. Home/Rental Insurance
Your home represents a huge, expensive asset. If it’s damaged, it’ll cost you, big time. And depending on how bad the damage is, you might not be able to live there while repairs are being made. Depending on your policy, homeowners insurance can help you pay for home repairs, short-term lodging, or even a new home . . . without a huge outlay of capital all at once.
Rental insurance is also a good idea, since the landlord’s property insurance usually only covers the structure and land, but not the contents of the rental property. Thankfully, rental insurance is usually very affordable, sometimes as low as $10 a month. At that price, you can’t afford to skip it.
4. Life Insurance
Life insurance is probably the most important insurance policy you will ever purchase. It protects your loved ones by providing income for them in the event you pass on. It can also be a good idea to insure your life, even if you aren’t the primary breadwinner. After all, the duties of a stay-at-home spouse are worth quite a bit. Though you may not pay a stay-at-home spouse a salary, it would be expensive to replace everything they do to run the household. Consider your needs, and make sure that you have adequate life insurance. There are also other forms of life insurance such as Mortgage Life Insurance, check out our post on the pros and cons for your reference!
Statistics show that 1 in 4 people will become disabled at some point before they retire. Even though this statistic includes people who receive short term disability, it is an astounding number. This makes us ask the question, “Can I afford a short term or long term disability?” Is your emergency fund large enough to sustain no income for a month? What about two months, or three months, or six months? The average monthly benefit paid by Social Security Disability Insurance (SSDI) is $1,065 per month. Will that be enough to support your family?
Disability insurance can help cover the unknown situations, and it can be a good idea, especially if you are the primary breadwinner in your household or work in a high-risk industry. Should you have an injury that qualifies for your policy, your disability insurance will pay you while you are unable to work. Disability insurance policies often vary substantially between providers, so be sure to thoroughly review your policy to understand which situations qualify for benefits, how and when you qualify for payments, how much you will receive, etc. Typically, there is a waiting period of up to 30 days or longer before disability benefits kick in, so it is always good to have an emergency fund in place so you can have something to live on in the mean time.
4 Types of Insurance Policies You Don’t Need
In one of my favorite episodes of the television show Family Guy, a slick door-to-door salesman convinces the bumbling Peter to purchase volcano insurance. When Peter first suggests that they’d never had volcano trouble in Rhode Island, the salesman responds “Don’t you think we’re due for one?” which of course ensures his sale.
Even though it would take effort to be as naïve as Peter, there are definitely times when it’s difficult to know if the insurance you are considering is worth your money, or if it’s just another example of volcano insurance. Here are four insurance policies that you can feel comfortable skipping:
1. Life Insurance for Children
The traditional purpose of life insurance is to financially provide for your family in the case of premature death. Since your children are not contributing financially to the family, and will most likely grow up to be safe and healthy, paying into premiums for their life insurance does not make sense. The money you would spend on premiums would be better spent in an emergency fund, a 529 plan for their education, or in an IRA.
- Exceptions:times when a life insurance policy for makes sense for children There are . This includes when your child earns an income and contributes to the family, or when you can get a very inexpensive rider on your life insurance policy. Otherwise, you may be better off skipping the life insurance policy for your children.
2. Mortgage Life Insurance
On the surface, this seems like a reasonable policy. This insurance will pay off your mortgage in the event of your death, giving your family one less financial headache during a stressful time. However, a good life insurance policy should provide your heirs with enough money to handle the mortgage and any other bills that they will have to pay. There’s no need to purchase a separate policy for this—just make sure that your life insurance is adequate to cover your family’s needs. (caveat: mortgage life insurance can be a good idea if you have preexisting conditions and are ineligible for a term life insurance policy; otherwise, term is the way to go).
3. Credit Card Insurance
For those who carry a balance on their credit card, having a policy that will pay your credit card bill in the event that you are unable to do so seems like a smart plan. The benefits of these plans are relatively limited, however, meaning you’re paying a monthly premium only to have your benefits capped and still be in debt. It makes much more sense to send the amount of the premium toward your bill and try to get your credit card paid off. You’ll save money on interest in addition to avoiding having to pay another bill.
4. Cancer and other Disease Insurance
The sad fact of the matter is that many medical insurance policies have holes in their coverage. Because of that, specific disease insurance policies—and specifically cancer insurance—have become popular over the past few years to take care of the gaps in regular medical coverage. The problem with these types of insurance is that they are so specific, and they do not necessary cover everything related to the disease. For example, many cancer insurance policies do not cover skin cancers, which are the most common form of the disease. A better use of your money would be to upgrade your current health insurance. That way you’re covered no matter what happens.
When it comes to insurance, always make sure you take the time to do some research into what you need and what will covered before you sign on the dotted line. And beware volcano insurance salesmen!
Are there other types of insurance people need (or should at least consider)? Leave a comment with your thoughts!
Photo credits: Keith Allison; stock photo