Now I know I haven’t covered insurance yet, despite having over 30 posts. Please don’t take this neglect as me implying that you don’t need to care about insurance. In fact, I believe the opposite. Insurance plays a vital role in a well-rounded financial plan.
What is insurance?
Simply put, insurance is a transfer of risk. What risk? The risk of loss.
We all have experienced a loss in our lives. Sometimes you lose a sock and have to buy a new pair. Sometimes you lose your car keys and arrive late to work. Sometimes you lose a spouse, and your life changes forever.
The risk we all take on encompasses the fact that loss will happen and we don’t know for sure what type and to what extent. For a fee, the insurance industry shares some of that risk. When making the determination to pay for the shared risk, you need balance this finite fee with the potential loss you could incur by not having insurance.
Despite the plethora of insurances products out there (did you know J-Lo reportedly insured her butt?), below are the five must-haves when it comes to mitigating your risk of loss.
Health Insurance: Insuring against the risk of a large monetary loss from illness. Even in the midst of our heated health care debate, I think all sides can agree that health care is expensive. Whether it’s an ordinary checkup, getting a prescription or having emergency surgery, the costs of health care can really put you in a bind. In fact, in 2009, over 60% of all bankruptcies were related to health care costs.
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.
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.
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.
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. Those people with dependents especially need to have this insurance.
We will go much more in depth with the particulars of these policies. The important thing right now is to make sure that you have them. If you don’t have them, go get them today. Seriously, don’t wait.