I know that the title of this post already has some of your eyes glazing over. Insurance is the type of thing that most ignore until they really need it. It amazes me how many clients come to me underinsured or not insured at all. A lot of them are couples with children or others depending on them.
You can easily make all the right moves with investing and your taxes but have that progress wiped away by an untimely and costly accident. The good news is that learning the fundamentals of the kinds of insurance you need is pretty straightforward.
In addition, if you happen to be a newly married couple you may be able to get better rates just from being married and combining your coverage. So today I’m highlighting the five fundamental types of insurance that you need and some tips on picking the right policies.
Health Insurance: Insuring against the risk of a large monetary loss from illness.
Not only is it beneficial to have this type of coverage, it’s now required due to the “individual mandate” in the Obamacare law (if you don’t qualify for an exemption). No matter where you fall on the health care debate, all sides can agree that health care is expensive. As Consumer Reports points out, “person for person, health care in the U.S. costs about twice as much as it does in the rest of the developed world.”
So what do you do? Most of us have health coverage through our employment. If not, you can find coverage through the Healthcare Exchange at Healthcare.gov. You can also participate in a Health Savings Account (HSA) to save money on the cost of your medical expenses.
Married couples save extra money by being able to pick the best coverage through multiple employers or being able to cover a spouse that is self-employed. Same-sex couples who previously had domestic partner benefits, can now avoid having to pay income tax on employer-paid premiums by getting married.
Homeowners/Renters Insurance: Insuring against the loss of your residence or its contents.
This type of insurance helps protect you from catastrophic fires, floods, or earthquakes that may make your residence inhabitable and/or destroy your belongings. Homeowners especially need to protect their most valuable asset with this kind of insurance. I’ve shared Ben’s story of how renters insurance really saved him when his apartment caught on fire. The last thing that you want to do is lose where you live and not have enough money to find another place or replace your belongings.
When choosing dwelling coverage, you’ll want to focus on a few key things. First, make sure you have the right type of policy. There are six basic homeowner forms.
- HO-2: Homeowners 2 Broad Form – protects against 16 perils named in the policy.
- HO-3: Homeowners 3 Special Form – protects against all perils, except those specifically excluded from the policy
- HO-4: Homeowners 4 Contents Broad Form – specifically for renters to protect their contents and provide liability protection.
- HO-5: Homeowners 5 Comprehensive Form – a premium policy that protects new, well-maintained homes. Like HO 3, it protects against all perils, except those specifically excluded.
- HO-6: Homeowners 6 Unit-Owners From – covers personal property, liability, and improvements to the owners unit.
- HO-8: Homeowners 8 Modified Coverage – Policy for older homes, with similar coverage to HO 02. It only covers cash value.
HO-3 provides appropriate coverage for most homeowners. However, if your insurer offers HO-5, and you can afford the premiums, I say go for it.
Secondly, understand your property and liability limits. For property, insure up to 100% or more of the replacement cost of the asset. For liability, get enough coverage to protect your assets and income.
Lastly, know what your policy doesn’t cover. Many policies don’t cover the loss of pets, cap the amount of jewelry insured, or for condo owners, wall coverings, appliances and fixtures. You can buy riders to make up for coverage you want but may not have.
Auto Insurance: Insuring against the loss of use of your vehicle and/or protecting against your personal liability in an accident.
Most states require this insurance, although many people are underinsured without knowing it. Coverage includes liability, personal injury protection, collision, comprehensive, and uninsured or underinsured motorists. You can also spring for optional provisions like car rental, travel expenses, and emergency roadside service.
When picking the amount of liability protection. you likely have a minimum amount required by your state. (You can find your minimum coverage here.) However, as with homeowner’s insurance, you should purchase enough to protect your assets and total net worth, if someone were to sue you.
For most middle income families 100/300/100 should meet your needs in the beginning. You can get similar amounts of coverage for underinsured/uninsured motorist coverage as well.
Married couples, men in particular, save money because in the eyes of insurance companies, married men get lower rates than single men. Additionally, many companies offer multi-line or multi-car discounts for families with more than one vehicle.
You definitely want both comprehensive and collision if you have financed a vehicle. (You don’t want to be stuck with no vehicle and a loan payment.) And I suggest keeping some collision and comprehensive, even if you own your vehicle outright
If you find that your wealth and/or income require larger than a 250/500/100 limit, you should ask your insurer about a personal umbrella policy (umbrella policy, for short). This policy can extend your liability coverage anywhere between $1 million to $5 million, if needed. In addition, it applies to potential liability from a home or boat incident.
Disability Insurance: Insuring again the risk of long-term illness or injury.
This insurance protection may be the most underutilized form of risk transfer, despite the fact that about one in four 20-year-olds will become disabled before they retire. In addition, a disabling accident occurs once every second in the U.S and 18.5% of Americans are disabled.
Most disability policies cover 50-70%% of your lost income. The lack of 100% reimbursement is supposed to incentivize you to go back to work as soon as possible. But if you can’t, you can purchase additional riders that will allow you for automatic increases without a medical exam should your income increase and will allow inflation increases should you need to receive benefits.
You can choose from both short-term and long-term disability. Short term benefits usually last 10 to 26 weeks. If you’re going to be out longer than that then you will need to purchase a long-term disability policy. This is especially crucial for married couples who likely have another person depending on their income and whose expenses will increase on the whole from a disabled spouse.
Two last things to consider: 1) pay your premiums after tax, so the benefits are not taxable to you if you receive them, and 2) consider a retirement protection policy, as a supplement to your disability policy in order to protect your retirement in the case of a long-term disability.
Life Insurance: Insuring against the loss of income due to a death in the household.
Money will never replace the joy and love people bring into your life. However, having to deal with a financial loss (especially the loss of a breadwinner) on top of the personal loss can be devastating. As you’ve guessed by now, it’s more crucial for couples who have each other and/or dependents relying on the lost income. Luckily, the amount of coverage may lessen by having another person who works.
You have to option of two types of policies – term and permanent. I’m a firm believer in just buying level-term life insurance. Term policies cover you for a specific period of time – usually 10, 20, or 30 years. In return, you pay a level premium (the amount you pay the insurance company for the policy) and get a fixed death benefit (the amount the insurance company pays your beneficiaries if you die while the policy is in place).
I like to think of it in terms of winning a bet. If you die during that specified time frame, your beneficiaries win because they receive the insurance proceeds. If you don’t die, the life insurance company wins and gets to keep the money you paid in premiums.
Having the right type and amount of insurance is crucial to building a solid financial foundation. Don’t ignore this part of your plan until it’s too late.