Whether you’re just starting to create a financial plan or you’ve already begun to build a solid financial foundation, not including insurance in your plan could be one of your biggest mistakes.
Think of insurance as a way to protect against the risk of losing what you already have in life (your good health, a home, a working car, your savings, your ability to work, etc.) and what you might have in the future. This protection also extends to caring for your loved ones, like a spouse and/or children.
You can also think of insurance as a safety net, just like your emergency fund. In fact, insurance acts as a safety net for your savings, ensuring you won’t have to spend all of your savings (or more) if something should go wrong with your health, home, car, etc. And, of course, if your savings and other assets are protected, you’ll still be able to reach your finance goals even after facing a financial hiccup.
You can already see why insurance is important. However, there is no one-size-fits-all-answer (wouldn’t that be nice!); insurance decisions should be based on your family’s needs, your age and health, and your economic situation. Read on to learn more.
Health insurance protects you against going into debt or depleting your emergency savings if you get sick, receive a severe diagnosis, or need to fill regular prescriptions.
The majority of people under 65 receive medical insurance coverage through their employers’ group insurance. The insurance company will pay a portion of your medical expenses when you visit a doctor or hospital or make routine visits for a pre-existing condition. The amount you pay for each visit, in addition to your monthly premiums, is called a copayment (or copay) and can vary depending on what kind of doctor you visit. Or a policy may not cover any costs until you’ve paid a set amount out of pocket, which is called a deductible. The higher the deductible, the lower the premium payments. Some policies have coinsurance, which is a percentage of the health care bill you’re required to pay once you’ve met your deductible.
Some plans will pay a portion of preventive medical expenses, like physicals or immunizations, to help ensure you don’t get sick. This can save lots of money in the long-run as you prevent the need for expensive prescriptions, surgeries, or frequent doctor visits!
It may feel difficult building a monthly premium for health insurance into your budget, but paying strictly out of pocket for a single hospital stay could wipe out your savings and checking accounts. That’s not a gamble many people are willing to make, and you shouldn’t.
The purpose of life insurance is to ensure your loved ones—especially any dependents, like children—are financially taken care of, your debts are paid off, and any funeral expenses are paid for. Without life insurance, if something were to happen to you, your partner and dependents would be faced with a huge financial bill on top of the emotional toll of your death.
What size policy is right for you depends on your situation: How many dependents do you have and what living standards do you want to ensure continue for them (i.e. replacing your income for a set number of years)? How much debt will need to be paid off? What type of funeral do you want?
Beyond this, you’ll also need to choose between whole, universal, or term life insurance (or a combination). Whole and universal are value-accumulating, meaning there is a cash value component that you can borrow against or cash in—but they’re also the more expensive policies. Term insurance has a lower monthly premium (just like health insurance) but it may only remain in effect until a certain age. What type you choose depends on factors such as cash flow, discretionary income, age and health, and financial objectives.
Disability insurance helps replace a portion of your income should an illness or injury prevent you from working. Think of it as protecting your income earning potential—one of your greatest financial assets!
Most employers offer some disability coverage, with most group long-term disability (GLT) replacing 60% of a worker’s base salary up to a determined monthly maximum. Bonus income and commission income are not usually included in that 60%. Ask one of your HR representatives to review the policy with you so you understand if there is a gap between what the company will pay out and your EIQ (earnable income quotient). If there is a gap, that’s a good indicator you should look into individual disability coverage.
Short-term disability may begin as soon as an employee is unable to work but usually starts a week after being out of work. It can provide benefits for anywhere from a few weeks up to a year. This type of coverage is also called “sick leave.” Some states require companies to offer a minimum level of short-term benefits.
Long-term disability starts three to six months after a disability and could provide benefits for a few years up to retirement. The shorter the benefit period, the lower the premium. Some long-term plans have what’s called “portability,” allowing you to keep the coverage if you leave your employer.
The ideal mix of group disability and an individual policy—of short-term and long-term policies—gives you the maximum income replacement during a claim. If possible, you should purchase an “any occupation” policy, which pays you if you can’t work any job after an illness or injury. You could go for a less expensive “own occupation” policy, but that only pays out if you can’t perform your current job—which means if you can work an entry-level minimum-wage job, you may not receive disability pay, and that could have a huge effect on your lifestyle.
Auto insurance protects your investment in your car. Liability coverage is required for all cars on the road, and it pays out for damage or injury caused by you or someone else driving your car. It can also cover expenses incurred in an accident with an uninsured motorist. However, this minimum coverage doesn’t protect against all possible damages to your car—you’ll want to consider policies that include collision (sometimes called comprehensive coverage), fire, and theft coverage. This will make your premiums more expensive; however, you can lessen this by choosing a higher deductible, which is the dollar amount you must pay out of pocket before the insurance company begins to pay.
Homeowners or renters
Finally, homeowners or renters insurance protects your dwelling and its contents. Can you imagine having to replace everything you own inside your home and find and afford for a new place to live if your house burned down, was flooded, or robbed? It’s a terrifying thought!
These policies should enable you to refurnish and, if you’re a homeowner, rebuild or repair your home after a catastrophe. It should also cover the cost of a lawsuit if someone is injured on your property. You should have a policy that covers at least 80% of your home’s replacement value (minus the land value and foundation), although most basic policies cover the contents of the house for 50% to 75% of the amount for which the house is insured.
As with the other insurance policies already covered, there are a variety of homeowners and renters policies offering a range of coverage at a matching range of prices. How much you need and can afford will depend on your individual situation and requirements.