By Dave Ramsey
Insurance is like a life jacket. It is a bit of a nuisance when you do not need it, but when you do need it, you are more than thankful to have it. Without it, you could be one car wreck, illness, or house fire away from drowning—not in the ocean, but in debt.
But for something so essential to our financial well-being, insurance is a complicated—even uncomfortable—topic. So, we have boiled your options down to the seven types of insurance policies you cannot go without.
While each one is a must-have, you should consult an independent insurance agent to help you find the right types of insurance customized to fit your needs.
Here are the seven types of insurance we recommend:
- Auto Insurance
- Homeowners/Renters Insurance
- Umbrella Policy
- Health Insurance
- Long-Term Disability Insurance
- Term Life Insurance
- Long-Term Care Insurance
Find out more about how each of these can help you and your family below!
Never drive around uninsured—not just because it is against the law, but also because the Insurance Information Institute reports the average loss per claim on cars is around $4,900. Imagine having to pay that kind of money out of pocket! There are several options to choose from when it comes to auto insurance, so there’s no reason to go without it:
- Liability coverage. If you are responsible for an accident, your liability coverage will cover the costs of any injuries or property damage caused in the collision. Most states require you to carry a minimum amount of coverage, so check with your insurance agent to understand your basic requirement.
- Collision coverage. This covers the cost to repair or replace your car if it is damaged or destroyed in a wreck.
- Comprehensive coverage. This level of insurance covers your losses that are not caused by a wreck such as theft, vandalism, flood, fire, and hail.
Again, an insurance agent is a good resource to help you determine the level of protection you need based on the type of car you drive.
Be sure your homeowner’s policy includes extended dwelling coverage. Extended dwelling coverage adds an extra layer of protection above your policy limits.
With extended dwelling coverage, the insurance company will replace or rebuild your property even if the cost exceeds your policy’s coverage. There is a limit to how much they will pay, however—usually 20–25% above the amount you are insured for unless you opt for more coverage. Keep in mind, the higher your home’s value, the higher the need for extended dwelling coverage.
Another note about homeowner’s insurance: Check with your agent about what your policy covers and what it does not.
- Flood Insurance. Most homeowners do not know that flood insurance is excluded from their policies. Flood insurance is also different from water backup protection. Ask your agent to go over the details with you.
- Earthquake Coverage. Depending on where you live in the country, earthquake coverage might not be included. If you need it, check with your agent to include it.
If you are a renter, you are not off the hook for insurance. Without renter’s insurance, it is up to you to replace your belongings if they are lost in a fire, flood, burglary, or some other disaster. A good independent insurance agent can walk you through the steps of covering the basics of both homeowners and renter’s insurance.
Remember, if your full emergency fund is in place, you can take a higher deductible and lower the premium on your policy to save money.
An umbrella policy is a type of insurance that adds an extra layer of protection for you and your assets when you need coverage that exceeds the limits of your homeowners or auto insurance. For example, if you are at fault for a multiple-vehicle accident, medical bills and property damages could quickly add up to more than your auto insurance will cover. If you are sued for the difference, your savings, your home and even your future wages could be at stake!
You can protect yourself from a situation like this with a personal liability umbrella policy. In fact, Dave recommends an umbrella policy for anyone with a net worth of $500,000 or more. For a few hundred dollars a year, an umbrella policy can increase your liability coverage from the standard $500,000 to $1.5 million.
Medical debt contributes to nearly half of all bankruptcies in America according to the Kaiser Family Foundation. If you are uninsured, you are leaving yourself vulnerable to potential financial catastrophe. One unexpected major medical emergency could amount to hundreds of thousands of dollars of expenses. Do not put yourself in that situation.
The high cost of medical insurance is not an excuse to go without coverage—even if you do not go to the doctor often. One option is a high-deductible health insurance plan combined with a Health Savings Account (HSA). With a high-deductible plan, you are responsible for more of your up-front healthcare costs, but you will pay a lower monthly premium.
A high-deductible health plan qualifies you to open an HSA—a tax-advantaged savings account specifically for paying medical expenses. Speak to an independent insurance agent about high-deductible health plan options you can combine with an HSA. Other HSA benefits include:
- Tax deduction. You can deduct HSA contributions from your gross pay or business income. In 2017, the tax deduction is $3,400 for singles and $6,750 for married couples.
- Tax-free growth. You can invest the funds you contribute to your HSA, and they grow tax-free to use now or in the future.
- Tax-free withdrawal. You can use the money tax-free on qualified medical expenses like health insurance deductibles, vision, and dental expenses.
Some companies now offer high-deductible health plans with HSA accounts as well as traditional health insurance plans. Compare your options and see if a high-deductible plan could end up saving you money.
Long-Term Disability Insurance
Long-term disability insurance protects you from loss of income if you are unable to work for a long period of time due to an illness or injury. Do not think a permanent disability could sideline you and your ability to work? According to the Social Security Administration, just over one in four of today’s 20-year-olds will become disabled before reaching age 67.
Those odds are too high for you to skimp on long-term disability insurance. If you are in your prime wage-earning years, a permanent disability could potentially derail your dreams of homeownership or paying for your kid’s college.
Bottom line: make sure you are covered. Many companies offer long-term disability insurance to their employees, so start there.
As you look into your options, you’ll also find short-term disability insurance designed to fill in income gaps caused by an illness or injury that keeps you out of work for three to six months. That is insurance you can skip—especially when you have a fully-funded emergency fund to cover your needs.
Term Life Insurance
Many of us take life insurance too lightly. The Insurance Information Institute reports that 30% of Americans carry no life insurance. Think about it: If you were to pass away unexpectedly, how would your spouse pay for monthly expenses without your income? In the dark moments of grief, the last thing your spouse should worry about is surviving financially in your absence. With a term life insurance policy for 10–12 times your yearly income, your family will not have to worry about making ends meet, losing their home, or changing their college plans if you’re not there to provide for them.
Make this a priority. Talk to an independent insurance agent about term life insurance today. It is affordable and will provide priceless security for your family. When you shop for life insurance, do not forget, term life insurance is always a much better deal than whole life insurance.
What about singles with no dependents? If you have a ton of debt and no savings, consider a small-term life insurance policy. A healthy 30-year-old can easily find an affordable policy that will at least pay off your debt and cover your burial expenses.
If you are debt-free and have enough cash to pay for your burial, you can hold off on life insurance, but why would you? The younger you are, the more affordable term life insurance is, so there is no reason to wait until you have a family to get insured.
Long-Term Care Insurance
Long-term care insurance covers a range of services: nursing home care and in-home help with basic personal tasks like bathing, grooming, and eating. Usually, long-term care refers to any ongoing assistance for those who have a chronic illness or disability. It is expensive, and long-term care costs are not generally covered by Medicare.
So, who really needs long-term care? To protect your retirement savings from the expenses of long-term care, get long-term care coverage no later than age 60. Remember that while you are not likely to need long-term care before then, many factors—like your health and family history—go into your decision when to buy long-term care insurance—and how much you’ll pay for it.
That is why it is important to talk to an insurance professional about long-term care that fits your personal situation. And even if you are not close to this stage of life, your parents might be, so take time to investigate their long-term care options too.