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 will most likely 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 reading about this stuff, it’s crucial for your safety. Plus, being informed can be the difference between getting great insurance and paying too much for the wrong policy.
1. 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. 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 common for employers to offer life insurance as part of their benefits package, but it’s worth noting 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.
Here’s an overview of some of the most common life insurance options you might consider.
Term life insurance
Term life insurance is the simplest, and most common form of life insurance. It covers your life for a specific period of time, and pays only if your death occurs during the term. This timeframe is typically anywhere from one to thirty years, the longer the term the higher the premium. Term life insurance is the cheapest option.
Whole life insurance
Whole life insurance, also known as permanent life insurance, covers you for your entire life—even if you live to be 100. If you make consistent payments toward your policy, you’ll build a cash reserve for your family upon your death. However, whole life insurance is much more costly than term life insurance plans.
Universal life insurance
Another form of permanent life insurance, universal life insurance is a type of plan that combines aspects of a term plan with an investment option. This can be an attractive option to those who want flexibility regarding where their payments are going—a portion to the death benefit that eventually pays out to your family, and a portion to investments that will hopefully grow over time.
Indexed universal life insurance
Indexed universal life insurance (IUL) gives policyholders the option to put money towards either a fixed account or an equity index account. Index accounts with universal life policies often include well-known indexes and can be a good option if you’d like to accumulate tax-deferred cash as well as maintain a set amount of money in a fixed account.
2. Disability income insurance
The odds of a 20-year-old becoming disabled before retirement is just over 1 in 4. 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 typically replaces 40% 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 range from one month to a year, depending on your policy.. 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 2020 survey by Genworth discovered that the average cost of a private room was $8,821 per month. When parents don’t have a long-term care insurance policy, their children 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 up to 90 days after impairment, and some may require that you receive paid care in the meantime.
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. 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.
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. $100,000 of liability coverage is a fairly standard amount.
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. As with most things in life, there isn’t a one size fits all approach to insurance. However, if you’re considering life, auto, homeowners, or renters insurance, you might want to check out SoFi Protect. You can also prepare for times of uncertainty by drafting your will, at a discount, with SoFi’s estate planning partner, Trust & Will. It’s never comfortable to think about tragedy, but having a plan is a smart decision for you and your family’s future.
Ladder policies are issued in New York by Allianz Life Insurance Company of New York, New York, NY (Policy form # MN-26) and in all other states and DC by Allianz Life Insurance Company of North America, Minneapolis, MN (Policy form # ICC20P-AZ100 and # P-AZ100). Only Allianz Life Insurance Company of New York is authorized to offer life insurance in the state of New York. Coverage and pricing is subject to eligibility and underwriting criteria. SoFi Agency and its affiliates do not guarantee the services of any insurance company. The California license number for SoFi Agency is 0L13077 and for Ladder is OK22568. Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other. Social Finance, Inc. (SoFi) and Social Finance Life Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderLifeTM policies. SoFi is compensated by Ladder for each issued term life policy. SoFi offers customers the opportunity to reach Ladder Insurance Services, LLC to obtain information about estate planning documents such as wills. Social Finance, Inc. (“SoFi”) will be paid a marketing fee by Ladder when customers make a purchase through this link. All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.
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