Which Insurance Types Do You Really Need? Here Are 6 to Consider
These days, you can insure almost anything. Did you know, for example, that Julia Roberts has insurance for her teeth, and James Bond himself (AKA Daniel Craig) insures his entire body? While you probably don’t need to insure any of your body parts for millions of dollars, you might find yourself wondering when you should buy life insurance, or whether renter’s insurance is really necessary. (Or maybe you have great teeth and want to know what kind of coverage Julia Roberts has.)
While you could spend hours searching to find out how much disability insurance or car insurance you need, let’s be honest—that sounds about as fun as a trip to the DMV. That’s why we’ve broken down which kinds of insurance you actually need (other than health insurance, of course), so that you can get the right coverage and avoid being underinsured. As much as no one looks forward to spending their time reading about this stuff, it’s crucial to make smart financial choices so that you’ll be safe. Plus, being informed can be the difference between getting great insurance and paying too much for the wrong policy. So read on, and you won’t have to worry about the bad stuff that can happen in the real world, and can focus instead on binge watching The Walking Dead (without frantically Googling “zombie invasion coverage”).
1. Term life insurance
We’ve all seen commercials for life insurance with spry seniors playing tennis and talking about the importance of covering your funeral expenses, but life insurance is about more than just financing your wake. Term life insurance allows your partner and your kids to keep paying the bills if something happens to you. People often think they don’t need life insurance if they don’t have dependents, but if you have debt such as student loans that someone has co-signed, your life insurance can be used to pay off your loans.
It’s worth considering that the life insurance your employer offers may not be enough, especially if you have dependents. Ideally, your life insurance payout should be enough to invest and yield returns that could replace your income annually. For example, if you assume that you’ll get a 5% return on the money you invest, you would need $1 million in coverage to replace a $50,000 income. Term life insurance that lasts 20 to 30 years might be the best option; it’s much cheaper than whole life insurance, and will cover you during the years that your children are at home and your spouse is paying off the mortgage.
2. Disability income insurance
The odds of an illness or injury leaving you temporarily or permanently disabled are 25%. Of course, this is a scary prospect, but instead of dwelling on it, you can take proactive steps to make sure you and your family are protected. Disability income insurance can pay up to 60% of your salary if you become disabled. Some employers don’t offer disability insurance, but even if yours does, you may want to consider a supplementary policy to top up the amount that you receive. Depending on the policy, disability insurance kicks in when you become partially, completely, temporarily, or permanently disabled—although there is often a waiting period before benefits start that could be between 30 to 120 days. The longer the waiting period on your policy, the cheaper your premiums often are. If you have to take a job that pays less because of a disability, some policies may pay you part of the difference.
Note that disability insurance is expensive, often between 1% and 3% of your salary, and many employers offer it as a benefit. If you’re evaluating offers between two employers, it’s worth keeping in mind how valuable this benefit is when comparing them.
3. Long-term care insurance
You might not want to think about your parents in a nursing home, but it is a possibility you need to bring up. Unfortunately, great long-term care is expensive—a 2016 survey by Genworth discovered that the average cost of a private room was $7,698 per month. When parents don’t have a long-term care insurance policy, their children (i.e. you) often end up footing the bill, or putting their careers on hold to provide care themselves. This can have a devastating impact on your finances, not to mention your energy.
To avoid that scenario, the American Association for Long-Term Care Insurance recommends that you buy a policy in your mid-50s to qualify for the best premiums. Benefits kick in when someone isn’t able to take care of the normal activities of daily life, or suffers from severe cognitive impairments. Policies vary by the specific level of impairment, the type of services provided, and the length of time the covered person lives after becoming impaired. Depending on your policy, your benefits may not start until 60 to 180 days after impairment begins.
4. Car insurance
If you own or lease a car, car insurance is a non-negotiable, but there are different kinds to consider. Collision and comprehensive insurance will cover damage to your car, and can help replace it if it’s been stolen. Liability insurance covers you if you get sued after causing an accident. In today’s litigious world, that possibility is higher than ever, and if it does happen, your financial life could be derailed by a million dollar judgment against you. For liability insurance, there are three maximum liability limits you can get in a car insurance policy: bodily injury per person in a given accident, bodily injury for all injuries in a given accident, and personal property damage in a given accident. Each state requires different insurance minimums by law, which you can check here.
However, you may want higher limits than the minimum. We recommend you have a $100,000 limit for each and get additional coverage with an umbrella policy (more on that later). When it comes to collision and comprehensive coverage, note that you can save money by getting a higher deductible of $500 or $1,000. And if you drive a car that’s worth less than $1,000 (hey—we’ve all been there), you might consider dropping collision and comprehensive, but you’ll still need liability. Even if you don’t own a car, in some states you need liability insurance to even get a license.
5. Homeowner’s or renter’s insurance
Homeowner’s insurance covers damages to your home or theft of personal possessions. It also includes liability insurance to cover accidents that happen on your property. However, it excludes things like floods, earthquakes, and the (hopefully unlikely) event of war. You should have at least enough insurance to cover the replacement value of your home and possessions. This means you want “Guaranteed (or Extended) Replacement Cost Coverage.” While the nomenclature can be confusing, do not get Actual Cash Value coverage—this covers you for the current value of your possessions, or what you could get if you sold your four-year-old used couch rather than what you’ll need to pay for a brand new couch. In other words, it may not replace your home or your stuff.
If you’re renting instead of buying, renter’s insurance is similar, but only covers your possessions and personal liability for damages. It’s worth having in case you leave the water on and accidentally flood your kitchen. The minimum deductible for tenant or homeowner’s insurance is usually $500, but according to the Insurance Information Institute, you can save up to 20% by raising the deductible to $1,000.
One important element for both of these is liability insurance. This protects you against most lawsuits, and covers things like people slipping and falling on your property (or in your rental apartment), or even if your dog bites someone. You’ll want $100,000 of liability coverage, which is fairly standard.
6. Umbrella liability coverage
Umbrella coverage is essentially extra liability insurance, and most importantly, it protects you and your assets in the event of a lawsuit. It covers you beyond the limits of your car or home liability coverage—for example, umbrella coverage will protect you from libel, slander and false imprisonment.
Often it is more economical to get an umbrella policy rather than getting excess home or car liability coverage. And it’s smart to coordinate car, home, and liability coverages—you would typically have a $100,000 deductible on your umbrella policy if your car and homeowner’s insurance have $100,000 of coverage. Kiplinger estimates that it would cost a family about $200 a year for the first $1 million in umbrella coverage, which is much less than what most people would pay for additional coverage in that amount—and many plans wouldn’t even offer that amount. In that case, you should raise the limit as your income grows and you accumulate assets. Someone with a $200,000 income and a million dollar home should have at least $2-3 million of coverage.
Overall, it’s worth considering which plans make the most sense for you—these are simply a starting point in making sure you’re fully covered when you need it (glamorous, Julia Roberts-level teeth aside).
Are you underinsured? If you’re wondering how much it would cost to get properly insured, consider a SoFi term life insurance policy—the application only takes 20 minutes.