As you work to become financially stable and build wealth, it’s important to make sure your assets are protected against unforeseen events.
Accidents and disasters do happen, and if you aren’t adequately insured, you could end up suffering a significant financial loss.
While insurance planning is not as direct a way of saving as investing, it can actually save you a significant amount of money over the long haul. You might want to think of it as a precautionary investment that can protect you from a major financial loss.
Insurance requires an upfront investment in the form of annual or monthly premiums. That’s why it’s important to consider what insurance you may need (and how much it will cost) when making a financial plan, since it can affect your overall budget.
Read on to learn why insurance is important, what kind you may need, and how to make paying for it feel manageable.
The Purpose of Insurance and How it Works
Insurance is a tool that helps you manage risk in a variety of areas. An insurance policy is essentially an agreement between you and the insurer that you will have some level of financial protection in the event something “bad” happens.
Generally, an insurance policy is in place for a set period of time, known as the policy term. When a policy term ends, you’ll need to either renew that policy or purchase a new one.
The premium is the cost of the insurance policy and it may be charged monthly, biannually, or annually. Costs for insurance vary widely and generally depend on how much risk the policyholder is to the insurance provider.
For example, if someone has been in a few car accidents and has picked up a handful of speeding tickets, they may find themselves needing to pay a higher auto insurance premium than if they had a perfect driving record.
Alongside premiums, many insurance policies also require the insured to pay a deductible in the event that they need financial coverage from the policy.
A deductible is the amount you must pay before the insurance company pays for their share of the expenses. Generally, the higher a deductible is, the lower the premium is.
💡 Quick Tip: Online insurance tools allow you to personalize your coverage for homeowners, renters, auto, and life insurance — all with zero paperwork.
Common Types of Insurance
Here are a few common types of insurance you may want to consider.
• Health insurance: Often available privately or through employers, health insurance offers financial assistance with medical expenses, such as doctors fees, prescription drugs, urgent care, hospitalization, medical tests, and other healthcare-related costs.
• Life insurance: Life insurance is payable when you die and allows any beneficiaries, such as your surviving spouse and children to receive funds necessary to maintain their standard of living.
• Disability insurance: This offers some financial protection in the event that illness or injury prevents the policy holder from working and earning a living. It typically provides a portion of lost income for a certain period of time. Some employers cover their employees with some form of company-paid disability income insurance. Since it may be only partial or short-term, many people seek to buy an individual disability income insurance policy.
• Auto insurance: This protects you against financial loss resulting from theft or damage to your vehicle. Auto insurance may also protect against damages caused by you or someone driving your vehicle, as well as help cover expenses you or anyone in your care may incur as a result of an accident with an uninsured motorist. Drivers are legally required by most states to hold an auto insurance policy.
• Homeowners or renters insurance: With this type of insurance, you can protect your home and possessions against disaster-related damage and theft. It can also insulate you from lawsuits if someone is injured on your property. Mortgage lenders often require this as protection for the investment they have made in your home.
💡 Quick Tip: Did you know that, in most states, landlords can require tenants to carry a renters insurance policy? Fortunately, the average monthly cost is just $15.
Personal Insurance Planning
Other than auto insurance (and, possibly, homeowners insurance), buying insurance isn’t mandatory. However, it helps to shelter you and your assets from damage, injury, or theft. When someone takes out an insurance policy, they are transferring some or all of their financial risk to a company.
Your insurance needs will depend on your family, age, assets, possessions, and economic situation. You may not need all of the above mentioned insurance policies, but many people will want to at least consider buying health insurance if it’s not already offered through their employers.
Even a basic (or high-deductible) health insurance plan can help protect both your physical and financial well-being in the event of an accident or illness.
Life insurance can also be important if you have a family who is dependent upon you financially. If you are married and your spouse contributes to the household, either financially or by caring for children and/or handing other responsibilities, your spouse may also want to consider buying life insurance — there are several different types available.
Renters and disability insurance can also be smart ways to hedge your bets against an unforeseen, and potentially costly, event.
As your financial and other life circumstances change, so will your insurance needs. That’s why it can be a good idea to sit down at least once a year and reevaluate your insurance coverage and consider whether or not you are adequately protected.
How to Build Insurance Into Your Financial Plan
Financial planning may sound fancy. But coming up with a basic financial plan simply involves thinking about your goals — both short term (such as having an emergency fund, paying off debt, or buying a car) and long term (like funding your retirement, saving for a child’s college education, or paying off your mortgage).
You can then assess your income and current expenses and create a monthly budget that helps you work towards your financial goals.
To begin the process, you may want to gather all of your bank, credit card, and loan statements for the past several months, along with saved receipts and your checkbook. Next, you may want to determine how much income you are taking in each month after taxes.
You can then go through all of your paperwork to come up with a list of all of your monthly expenses. To be even more accurate, you may want to track how you spend cash for a month or so before finalizing this list. Many of us are surprised to find out where and how much cash tends to disappear each month.
Once you have a sense of your monthly spending, you can group expenses in categories (such as “groceries” and “utilities”), and then divide them into essential and nonessential spending.
A rule of thumb for budgeting is the 50/30/20 plan. This allocates 50 percent of your income to essential/fixed expenses, 30 percent on discretionary expenses, and 20 percent towards savings goals.
When you tally up your essential, or fixed, expenses, here’s where you’ll want to include insurance. If an insurance premium is charged annually, you can divide it by 12 (or, if it’s biannual, divide by 6) to make sure you’re allocating enough money in your monthly budget to cover this expense.
The Takeaway
While the upfront expense of insurance may be something no one wants to pay, it can be well worth the investment by protecting you from unexpected financial losses. Having a financial plan (and an emergency fund) in place can also provide protection against the unexpected. And if you factor in the cost of insurance in your monthly spending plan, you won’t get hit with a large bill out of the blue that you don’t have the cash to cover.
When the unexpected happens, it’s good to know you have a plan to protect your loved ones and your finances. SoFi has teamed up with some of the best insurance companies in the industry to provide members with fast, easy, and reliable insurance.
Insurance not available in all states.
Gabi is a registered service mark of Gabi Personal Insurance Agency, Inc.
SoFi is compensated by Gabi for each customer who completes an application through the SoFi-Gabi partnership.
Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
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 Ladder Life™ policies. SoFi is compensated by Ladder for each issued term life policy.
SoFi Agency and its affiliates do not guarantee the services of any insurance company.
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.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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