Earlier this year, when the hubs and I reviewed our spending from last year and set up our 2016 budget, we talked about incorporating more (and better) insurance into our financial plan.
Now, 6 months later, we’re finally putting the final touches on all 6 different types of insurance policies that we determined were necessary to protect us from every sort of situation, and I’m really proud of it.
Why?
Because often people our age (mid-twenties) neglect insurance until they’re much older, or just neglect certain types of insurance, which causes those policies to be much more expensive when they do finally incorporate them into their budget and long-term financial plan.
All told, there are 6 different types of insurance policies you should have:
Health Insurance
Health insurance is, far and away, the most important type of insurance you should have.
Everyone will need medical care at some point, and since medical debt is the largest cause of bankruptcy in the United States, I cannot stress the importance of health insurance enough. Before the Affordable Care Act, health insurance was not mandated, but for most people was available through their job, and expected in the budget.
But now, with the Affordable Care Act, health insurance is mandatory, and you will receive a fine (gradually growing larger each year) if you do not have it.
The best place to find health insurance at an affordable rate, and with the best coverage, is usually through your employer. However, not every employer is required to provide health insurance, the plan doesn’t cover much, is very expensive, or you have a special circumstance, such as you’re self or unemployed.
If this is the case, try the Government Healthcare Marketplace, or eHealthInsurance.com to compare rates, coverages, and prices.
Key Questions to Ask:
What Is The Deductible? Is is per person, per family, per year?
Are there any copays?
What is your yearly maximum out of pocket?
When does the insurance cap out?
Auto Insurance
Also mandated in your state, auto insurance protects you and other driver’s from the huge financial costs of causing/being in an accident.
After all, even if you’re a perfect driver, acts of God like deer, hail, and storms happen. You can’t control everything, and auto insurance protects you from suffering financial ruin should something go horribly wrong.
Key Questions to Ask:
How much property damage will this cover?
What portion of medical bill will this cover?
What is the deductible?
Are there any perks like free glass, accident forgiveness, etc?
Does it meet the requirements for your state’s minimum coverage?
Homeowner’s Insurance
Your home is important to you, above and beyond your car, even.
It’s where your family lives, where you brought your children home to, and where you’ve made a lot of memories, so it makes sense that you would want to protect it in case of fire, storm, floods, or other disasters.
It is also probably the most valuable asset you own.
As a result, your homeowner’s insurance is incredibly important – and probably mandated by your mortgage company – and can be quite pricey. Shop around for homeowner’s insurance, and be sure to factor this cost into your budget every month.
Key Questions to Ask:
What is the deductible?
What is the total cost to rebuild?
Have you added flood coverage (if in a flood plain)?
Will your policy cover the cost of a hotel or rental while the house is being rebuilt?
What about all the belongings inside the home? Does this policy cover them as well?
Life Insurance
Life insurance is a budget line that everyone needs, but hopefully not for some time.
In a nutshell, it protects those that depend on from having to make large life changes if you should pass away. It protects them from things like having to assume your debts without a way to pay them off, requiring your spouse to get a job outside the home (if they stay home with children), or going from 2 incomes to one.
It also ensures things that have more than a financial connotation.
For example, if you were to pass away tomorrow, would you want your family to have to move out of your home? Would you want your children to have to switch care providers or schools? And how about activities? Would you want your family to have to break away from everything they’ve ever known?
Chances are, you would want your family’s life to stay relatively constant to make the time of mourning that much easier on them.
There are several different types of life insurance, the most common of which are Whole Life Insurance and Term Life Insurance, and you’ll need to decide which is right for your family.
Whole Life Insurance does not expire at a set age, and generally has a small rate of return, like an investment account. You can also “draw” on your whole life insurance policy if you need cash for a large or unexpected expense. As a result, Whole Life Insurance coverage is more expensive than it’s counterpart, Term Life Insurance.
Term Life Insurance costs less, but expires at a certain age, depending upon your policy. It was designed as an affordable alternative to Whole Life Insurance, since the insurer is betting that you won’t pass away at a young age, therefore it is less likely they will have to pay out before the policy expires. By contrast, the policy saves you money because you’re betting that you won’t have large debts, you’ll own your home, and that your children will be out of the house by the time you pass away.
Key Questions to Ask:
Who are my beneficiaries?
Have I set up my insurance to take care of my children if both my spouse and I pass away?
What is the death benefit? Will it cover my debts and my family’s needs comfortably?
Is there a cash benefit to the policy?
Disability Insurance
Now, before you go all “not another one!” on me, hear me out, because some of your disability insurance may already be taken care of.
Many employers provide some sort of disability insurance for you, and although coverage varies from employer to employer, the standard is 60% coverage at not cost to you. Alternatively, you may be required to pay for this coverage, or have no coverage at all, it just depends upon your employer.
But, in the case of 60% coverage, what this means is that if you were to have a long-term disability, 60% of your salary would be covered by that disability insurance.
That sure is a nice perk, but for most people 60% isn’t going to cut it to keep the bills paid and food on the table, which is why you should at least consider purchasing an additional 30% salary coverage, which would bump your salary replacement level up to 90% – a lot better than 60%.
The best and first place you should look for this coverage is through your employer. Often, it can be purchase at an additional, but minimal cost. If your employer doesn’t provide disability coverage, or you need more than you can get through them, check with your insurance agent for recommendations.
Think you won’t use Disability Insurance? Think again:
A pregnancy puts you on bed rest? Use your disability insurance.
An injury/surgery unrelated to work requires some recovery time? Use your disability insurance.
Come down with an illness that requires hospitalization? Use your disability insurance.
Key Questions to Ask:
How much of my salary will this coverage replace?
What is the annual (or monthly) premium?
Will taxes be taken out of the replaced salary?
How many weeks of coverage will this policy replace?
Long-Term Care Insurance
I know, getting old isn’t something you want to think about, and believe me, I’m with you.
I mean, I just turned 25 and it kind of hit me that the first half of my 20’s was over. It wasn’t the best birthday, to say the least.
But the bright side of realizing I’m getting older is that it made the hubs and I think about our insurance, specifically insurance that will cover the costs of a nursing home, whether we use it as we age, or because of a serious injury that leaves one of us needing intensive care in a nursing home.
If you purchase it while you’re young, Long-Term Care Insurance is insanely cheap. Yes, you’re paying for the cost over the course of many years, but with the rising costs of senior care and the likely hood that you will live longer than ever, this coverage is super important.
Key Questions to Ask:
What is the maximum payout for the policy?
Does the policy adjust for inflation?
Does it expire at a certain age?
How much will it pay out per day?
What is the qualification to start coverage?
One Last Option
While this last point isn’t one that I would recommend to everyone, but since this is a personal finance blog, it does have a place here.
Rather than opting to purchase 6 policies with different premiums and coverages, you also have the option to self-insure in a few instances.
Health Insurance and Auto Insurance are mandated by laws, so you will have to purchase those policies, but the others are somewhat negotiable.
Just be warned, the costs to self-insure can total in the millions, and a mistake could cost you and your family more than just money.
Homeowner’s Insurance
It’s very important to be protected in case of a tragedy, but if your mortgage is paid off, you’re not required to carry homeowner’s insurance. Cancelling the policy will certainly save you money, but where will that leave you if your home is destroyed?
Homeless, that’s where.
Rather keeping a policy, if you’ve saved above and beyond the requirements of retirement, you could self insurance. Basically this means that you have enough money in the bank to cover the cost of rebuilding, replacing everything inside, and paying for a place to live during the rebuild – that is not already slotted for a specific purpose such as retirement.
Life Insurance
Self-Insuring is also an option for life insurance, especially if you have very little debt, own your home, and have significant savings not required for retirement.
I don’t recommend this, not because of the massive amount of money you would have to save, but simply because landing on your perfect number to self-insure with is so hard.
You have to ask yourself questions like “What does it cost my family to live for 1 year, comfortably?” and “For how many years do I want them to live off the insurance money?”
It’s a very hard number to come by, so proceed with caution.
Disability & Long-Term Care Insurance
You can also skip the Disability and Long-Term Care Insurance if you’ve saved aggressively, and this number is even harder to come by than the Life Insurance amount.
Insurance isn’t the most fun item in your budget, that’s for sure.
But it’s absolutely necessary.
And, although you may never need it, planning your finances requires thinking through every possible contingency, even those that aren’t entirely pleasant.
However, all of these policies can cost a small fortune if you haven’t planned for them, so check out these ideas to help you start budgeting, save money, or make extra money:
3 Free Money Management Tools
How To Determine When Your Budget Needs An Overhaul
33 Ways To Cut Your Budget, Make Extra Money, and Save Your Budget!
5 Ways to Make Money Online – While You’re At Work
My Blogging Income Reports
How I Make $1,205/year in Less Than 5 Minutes a Day
How I Make $1,753/year in Passive Income
Here Are 26 Crazy Ways to Score FREE Baby Stuff Worth $2,889
Have you covered all of these types of insurance in your budget?
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The post The 6 Different Types of Insurance Policies That Should Be A Part Of Your Financial Plan appeared first on Living on Fifty.