Types of Insurance Policies You Need
The right insurance is critical to your financial plan
Insurance can offer peace of mind if you know you're protected against the unexpected. You can find an insurance policy to cover almost anything imaginable, but some are more deserving than others of a place in your financial plan. As you map your financial future, these four types of insurance should be firmly on your radar.
Health insurance is easily one of the most important types of insurance to have. Your good health is what allows you to work, earn money, and otherwise enjoy life. If you were to develop a serious illness or have an accident without being insured, you might find yourself unable to receive treatment or even find yourself in debt to the hospital. While the government no longer mandates health insurance as of 2019, it's not something to discount.
Thankfully, many employers provide health insurance benefits to full-time and even some part-time employees. If you do not currently have health insurance coverage, this is the first place to check as it will generally be the most affordable. If you're married, you may both be able to receive coverage under just one of the employer plans. When both employers make health insurance available, a careful comparison can help you decide which plan to use. Consider the co-pays, deductibles, premium costs, network coverage, and covered expenses to determine which plan yields the most benefits.
If your employer does not offer health insurance or you're self-employed, you'll need to explore your insurance options. The federal healthcare marketplace is a good starting point. Alternately, you can contact insurers directly to see what type of coverage is available in your state. Again, the same criteria used to evaluate an employer's plan would need to be taken into account as you compare policies, in terms of the cost and coverage.
While purchasing your health insurance may be more expensive than getting it through your employer, there may be a silver lining. If you're self-employed or a freelancer, health insurance premiums you pay out of pocket qualify as a tax deduction. Deductions reduce your taxable income for the year, potentially lowering your tax bill or increasing the size of your refund.
This type of policy is more important if you are married or have children, but even single people can benefit from having life insurance. Life insurance can meet several financial needs. In the case of someone who's married with a family, it can replace lost income, help to pay any lingering debts after your death, or pay for your children's college education. If you're single, life insurance could pay for burial costs and pay off any debts you leave behind.
If you do not currently have life insurance, your best bet is to check with your employer first. Many employers offer basic group life insurance as a benefit, and some even allow you to purchase additional coverage at a very affordable rate. Outside of employer plans, there are hundreds of insurance companies that can provide the right coverage for you.
One thing to consider is whether to purchase term or permanent life insurance. The term life insurance policy covers you for a specific period, typically 10 to 30 years. Permanent insurance covers you your entire life, as long as premiums are paid. This type of coverage also allows you to build cash value that you can borrow against or invest for growth. Of the two, term life insurance tends to be more flexible and less expensive, but if you're looking for an investment component, you may prefer permanent coverage.
Remember that with most types of life insurance, your ability to get covered depends on your age and health profile. The younger and healthier you are, the lower the cost is likely to be, but be prepared to take a brief medical exam as part of the application process. Some life insurance companies offer no-exam term life policies. While this may be easier to apply for since you may only have to complete a brief health questionnaire, this type of coverage could carry higher premiums.
Related: Best Whole Life Insurance Policies
One type of policy—that for most people is actually mandatory when you have a mortgage—is homeowner's insurance. If you borrow money from the bank to purchase a home, they will require the asset to be insured. For many people, this insurance premium is built into the mortgage payment. For many people, their home is their greatest asset, so it is vital to protect it adequately.
If you rent instead of own, a renters insurance policy is just as important. Your belongings inside the dwelling can add up to a significant amount of money. In the event of a burglary, fire, or disaster, you should be able to have at least a policy that can cover most of the replacement costs. Both homeowners and renter's insurance can also protect you against personal liability if someone is injured at your home.
Like any other type of insurance, take time to compare coverage and premiums. Homeowner's insurance, for instance, may not cover you in the event of flood damage or damage from an earthquake. If you live in an area that's prone to those types of events, you may need to supplement your policy with additional natural disaster coverage.
Another type of policy that is often required is auto insurance. Most states require by law that you have basic auto insurance that covers liability. If you're buying a car with a loan, you may also be required to add collision coverage to your policy. If you're in an accident, liability insurance covers damages to the other vehicle, while collision covers damage to yours.
The most common reason to have auto insurance is to cover the replacement of an expensive asset. Like a home, automobiles can be quite expensive, and if it gets damaged, you want to be able to repair or replace it. But there is more to auto insurance than just covering the car itself.
Most automotive insurance policies cover bodily injury or death of another person in an incident in which you are legally responsible. While it generally pays for medical expenses related to the incident, it can also cover legal defense costs. You will also generally find medical payment coverage that pays for medical treatment for you and your passengers during an accident regardless of who was at fault. You can also include rental car coverage in your policy if an accident leaves your car undrivable.
Remember, the more coverage you add to your policy, the higher the premium costs may be. There is, however, a possible solution to make insurance of any kind more budget-friendly. The higher your deductible, the more you may be able to lower your monthly premium costs.
U.S. Centers for Medicare & Medicaid Services. "No Health Insurance? See if You'll Owe a Fee." Accessed June 9, 2020.
Intuit Turbotax. "Deducting Health Insurance Premiums if You're Self-Employed." Accessed June 9, 2020.
Transamerica. "Term Life Insurance." Accessed June 9, 2020.
John Hancock. "Permanent Life Insurance Options." Accessed June 9, 2020.
Fidelity Investments. "What Is Life Insurance?" Accessed June 9, 2020.
Fidelity Life. "About No Exam Life Insurance." Accessed June 9, 2020.
Nationwide. "What Is Personal Liability Insurance?" Accessed June 9, 2020.
Esurance. "Homeowners Insurance and Natural Disasters: Are They Covered?" Accessed June 9, 2020.
Progressive. "New Car Insurance." Accessed June 9, 2020.
California Department of Insurance. "Automobile Insurance Information Guide." Accessed June 9, 2020.
Nationwide. "What Is Auto Liability Insurance Coverage?" Accessed June 9, 2020.
Allstate. "What Is Medical Payments Coverage?" Accessed June 9, 2020.
Washington DC Department of Insurance, Securities, and Banking. "Things to Know About Car Insurance and Rental Cars Before Starting Your Road Trip." Accessed June 9, 2020.