Life is very unpredictable. You could get in a car accident or contract a terminal illness. These things can all lead to massive debt if not handled correctly. This is where insurance comes in. Although paying for insurance may be bothersome, and researching various plans for different scenarios is difficult and often complicated, you’ll be thankful for a solid safety net when an unpredictable event happens.
Basics of Insurance
Insurance is where a company or government agency provides protection against some type of loss, such as damage to property, or surgery to correct a health problem, in return for a payment, called a premium. The idea behind insurance is that you are protecting yourself against any future uncertainty. It is more likely than not that you will need to use your insurance plan in the future, so ensuring that you are protected from the unpredictability of life is important.
When talking about insurance, there are many vocabulary words that you may not know. This section will define some of those terms.
- Deductible: The amount of money the insured person needs to pay before the insurance company starts to pay for the loss experienced
- Premium: Amount of money paid for an insurance policy
- Co-pay: A fixed amount the insured pays for covered services (usually only applies to health insurance)
Types of Insurance
There are many types of insurance. The ones I will cover are life insurance, health insurance, automobile insurance, homeowners/renters insurance, and long-term disability insurance.
Life insurance is important especially if you have a family. It can replace lost income, pay for your child’s college education, and help pay debts for your family after you die. If you’re single, life insurance can pay debts you leave behind and pay for your burial.
There are two types of life insurance: term life insurance and permanent life insurance. Term life insurance is a policy where you pay for a certain amount of time. Permanent life insurance is where you have to pay for your whole life. Term life insurance is more flexible while permanent life insurance has an investment component. Most people have term life insurance as it is much more affordable. Remember, life insurance is cheaper when you are younger so don’t wait until you need it to get it. You are more of a liability to the insurer as you age.
Health insurance is very important because if you suddenly fall sick or obtain an injury, health insurance is what pays for your treatment at the hospital. If you don’t have health insurance, you may find yourself unable to receive treatment at the hospital. Furthermore, medical debts are responsible for nearly half of all bankruptcies in the United States.
Unfortunately, health insurance is expensive and has continued to increase in price. However, that is not an excuse to not get it. If you don’t have health insurance through your employer, one option is for a high-deductible health insurance plan combined with a Health Savings Account (HSA), a tax-advantaged savings account specifically for paying medical expenses. The benefits of having an HSA are tax-free growth, tax deduction, and tax-free withdrawal. You can also explore the federal healthcare marketplace or even buy your own health insurance. Although buying it yourself may seem more expensive, if you’re self-employed, health insurance premiums count as a tax deduction.
Everyone needs automobile insurance as it is against the law not to have it. It also covers a very expensive asset that most people do not want to lose. Besides covering the car, auto insurance can also help pay medical and legal defense expenses. Auto insurance has different types of coverages. Liability coverage will cover the cost of injuries or property damage you caused in a collision to the other car. Collision coverage covers the cost of damage to your own car. Comprehensive coverage covers the damages caused to your car that are not from a wreck, such as fire, theft, or vandalism. The level of coverage one needs depends on the type of car, and the price of auto insurance will depend on where one lives, their age, and driving record.
If you have a mortgage, homeowners insurance is required. When you borrow money from a bank, insurance premiums are typically built into the mortgage payment. Property is usually a person’s greatest asset so it is important to keep it insured. Additionally, homeowners insurance can include extended dwelling coverage. This means that the insurance company will replace or rebuild your property even if the cost is higher than your insurance policy. They’ll usually pay about 25% higher than the amount you are insured for. If your property is of very high value, extended dwelling coverage is something you should look into. You should also make sure that your homeowners insurance includes floods and earthquakes, as not all insurance policies do. You can check with your insurance agent regarding your insurance policy.
If you’re a renter, you might be thinking “Great! I don’t need to pay homeowners insurance!” However, you still have to pay insurance, just a different type, called renters insurance. If there is a burglary or a fire, renters insurance will cover most of the replacement costs.
Long-Term Disability Insurance
Long-term disability insurance covers the loss of income that will happen when you are unable to work for a long period of time due to illness or disability. Although you may believe that you will never get disabled, statistics show that 30% of workers entering the workforce will become disabled and unable to work before they reach retirement. This means that you should definitely have long-term disability insurance just in case. Otherwise, you may not be able to pay for your kid’s college or buy a car.
Even if you have great health and life insurance, without long-term disability insurance you may find yourself unable to cover living expenses if you can not work for an entire year. Many employers offer long-term disability insurance as well as short-term disability insurance. However, you can skip on short-term disability insurance if you believe you can cover your living expenses for a few months.
Steps for Choosing and Maintaining Insurance
Most Americans get insurance from the company they work in. You should check with your employer as that insurance is usually the most affordable. However, if you are currently unemployed or want to explore more options, this is how you should pick your insurance.
- Speak to an insurance agent
- Consider the co-pays, deductibles, premium costs, network coverage and covered expenses to determine which plan saves the most money by doing research on the internet (there are various sites and online resources to do this)
- Calculate effect of new premiums on your spending and disposable income
- Constantly monitor whether or not your insurance is adequate for your current scenario
Insurance is very important to your financial well-being. You should definitely have the five types of insurance that are covered in this article. However, you can also invest in more types too, such as pet insurance or long-term care insurance. Although insurance may seem very expensive, you will feel grateful to have it when something happens. Never skip having insurance, as it is a crucial tool that ensures your protection in the future.
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