I remember the excitement of buying my first car. It was a used 2004 Hyundai Accent that I bought off Craigslist for $3,500.
Here’s a picture of what my car looked like:
When I sold the car a few years later, I remember trying as hard as I could to take a “for sale” picture that didn’t make it look so ugly. I quickly realized that was impossible.
The car wasn’t pretty, but I paid cash for it and that made me happy. At least I wouldn’t have any monthly payments other than gas… Right?
It was then that I learned the reality that I needed to buy insurance.
Nobody likes insurance. It costs money and we hope we never have to use it.
But here’s the thing – we need it. Insurance protects us from what could go wrong so that we can invest and plan for what we want to go right.
That being said, there are good types of insurance and bad types. Let’s start by taking a look at the insurance you can’t live without:
#1 Life Insurance
Do you need life insurance? You do if there is someone who is financially dependent upon your income.
There are two types of life insurance – term and permanent.
Term life insurance is very simple. You buy insurance coverage that lasts for a finite period of time (the “term”) and if you pass away during this term your beneficiaries will receive your death benefit.
Unless you have any serious health issues, term life insurance is usually very inexpensive for the amount of insurance coverage that it provides. If you’re just looking for pure life insurance to protect your family if something happens to you, then term is the best way to go.
Permanent life insurance is different. There are different types of permanent life insurance and some are better (or at least less bad) than others.
There’s whole life insurance, universal life insurance, variable life insurance, variable universal life insurance, indexed universal life insurance and more. Confused yet?
If you’re in a position where you have sufficient investments and savings to provide for your family if something happens to you, then you are considered self-insured. At this point you can choose to maintain a life insurance policy if it provides peace of mind, but it’s no longer essential.
#2 Health Insurance
When President Obama passed The Affordable Care Act in 2010 he mandated that everyone purchase health insurance.
With President Trump’s more recent Tax Cuts and Jobs Act, the individual healthcare mandate will be repealed beginning in 2019.
However, just because it’s no longer required doesn’t mean that you should go without health insurance. Take a look at these average costs from HealthCare.gov:
Fixing a broken leg can cost up to $7,500.
The average cost of a 3-day hospital stay is around $30,000.
Comprehensive cancer care can cost hundreds of thousands of dollars.
Those are expenses that most people can’t afford to cover entirely on their own.
Health insurance is expensive, but the cost of not having it can potentially be much greater.
#3 Auto Insurance
If you’re a driver then auto insurance is required. So there’s not much confusion around that.
The confusion begins when you start looking at all the different aspects of car insurance. Here’s a list of basic insurance terms and what you should look out for in each of them:
Deductible – This is the portion of any damages you will have to pay before your insurance coverage kicks in. The higher your deductible the lower your premium. If you have a fully funded emergency fund then it often makes sense to increase your deductible to lower your premium.
Liability Coverage – Your vehicle isn’t the only thing you’re protecting with auto insurance.
Liability coverage covers property damage to any cars or property that you damage in an accident. It also covers bodily injury liability if the other driver has medical expenses as a result of the accident.
Collision Coverage – While liability coverage protects you against the liability of damaging another person or their property, collision coverage protects you against damage to your own car. If the other driver is at fault in an accident and if they have sufficient liability coverage then they will pay for damages to your car. If you’re at fault though then collision coverage will pay to repair or replace your car.
Comprehensive Coverage – What happens when there’s an accident that’s not your fault or another driver’s fault? This is where comprehensive coverage comes in. If your car is stolen or if it’s damaged by a storm, falling tree, or natural disaster, then comprehensive coverage will pay to repair or replace your car.
There are many other terms that you will see when you review your auto insurance policy, but the terms above are the most common and the ones that you should be most familiar with.
#4 Disability Insurance
In my experience, this is one of the most underinsured areas. With the exception of those that have disability insurance through their employer, I see far too many people with no disability insurance coverage at all.
From a financial perspective, a disability can potentially be more damaging to your assets then death. If you pass away without life insurance then your family has to deal with the financial impact of losing your income for as long as you would have worked. That alone can cripple a family.
But if you are disabled, then not only does your family lose your income, they also have the additional expenses that may come with providing for your care and any medical expenses you will likely have.
Disability insurance comes in two forms. There’s long-term disability insurance and there’s short-term disability insurance.
Short-term disability insurance typically lasts between three and six months. Long-term disability insurance can last for a few years or all the way until age 65, depending on the policy. Both long-term and short-term disability insurance will cover a percentage (60% is common) of your income up to a fixed maximum.
If you have a fully funded emergency fund then short-term disability might not be crucial. Long-term disability, however, is a must-have. Especially when you consider how inexpensive it is relative to the potential costs you would incur without it.
#5 Identity Theft Insurance
The FTC estimates that it takes six months and 200 hours of work to recover from identity theft. Let me put that another way – get identity theft insurance!
It only costs a few dollars a month and it can save you months of headache and frustration. But don’t confuse identity theft insurance with credit monitoring services. Credit monitoring will track your credit score and tell you when something is wrong. True identity theft insurance companies will actually work on your behalf to recover your identity and clear up the damages.
With recent data breaches at places like Uber, Equifax, Target, and more, you want to make sure that your identity is safe.
#6 Homeowners Insurance
If you drive a car you’re required to have car insurance. If you own or rent a home though, you’re not legally required to obtain homeowners insurance.
But that doesn’t mean you shouldn’t. In fact, if you have a mortgage on your home then the mortgage company will almost certainly require you to own a homeowners insurance policy. And even if you don’t have a mortgage it would be foolish not to have homeowners insurance.
While every policy is different in terms of what it covers, homeowners insurance can cover the following:
Dwelling protection – this covers the structure of the home that you live in as well as any structures attached to it (think garage or a deck).
Other structures protection – this covers structures that are on your property, but aren’t attached to your home (think shed or detached garage).
Personal property protection – this covers personal belongings (furniture, electronics, clothes) that are stolen or damaged by a covered risk.
Liability protection – this covers your liability when someone who doesn’t live with you is injured on your property.
It’s important that you speak with your insurance agent to ensure that your policy fully covers your home. Your home is a valuable asset that you need to make sure is properly insured.
#7 Renters Insurance
Unlike homeowners insurance, renters insurance doesn’t actually cover the house or the structure that you’re living in. Your landlord would need to own homeowners insurance to do that.
Renters insurance covers damage to personal belongings and it provides coverage against theft. It also provides liability coverage to you if someone is hurt in the home or apartment that you rent.
Because it’s not covering the actual housing structure, renters insurance is often very inexpensive. I’ve seen policies starting as low as $5 per month. The price goes up depending on how much coverage you want.
#7 1/2 Umbrella Insurance
Now this type of insurance isn’t essential for everyone. This is the ½ in the 7 ½ types of insurance you need because you may or may not need it depending on your situation.
Your auto insurance, homeowners insurance, and other types of insurance all contain limits to how much they will cover you. Once these limits are reached, however, you’re on your own. That is unless you have umbrella insurance.
For example – let’s say you have a net worth of $1,000,000 and you have homeowners insurance that provides $500,000 of liability coverage. Then assume that your dog attacks a neighbor on your lawn and you are faced with a lawsuit of $1,000,000.
Your homeowners insurance policy would cover $500,000 of that, but you would still be liable for another $500,000. This is where an umbrella insurance policy comes into play. The umbrella policy would cover the remaining liability.
Once your limits are reached on your other policies, umbrella insurance provides the remaining liability coverage. Unlike other policies that only provide specific coverage (i.e. home or auto), umbrella insurance is a single policy that will cover just about any aspect of your financial life.
If you have a net worth of $500,000 or less, then you probably don’t need an umbrella insurance policy. Just make sure that you have $500,000 of liability coverage on policies like your homeowners and auto insurance.
Types of insurance you shouldn’t own
The insurances listed above are almost always good buys, assuming you get the right policy. Then there are the bad buys. These are the types of insurances that are often unnecessary, redundant, or just cost way too much money.
#1 Life Insurance for Kids
Are you financially dependent on your kids? Unless your kid is a child movie star, probably not. And if you’re not financially dependent on your child then you don’t need life insurance coverage for them.
I see far too many life insurance policies on kids (I’m looking at you Gerber) sold as investment accounts with a life insurance add-on. I’ll spare you the math on this one, but if you’re buying this as an investment account then your returns stink. Drop the coverage and do something better with that money.
#2 Cancer Insurance
This one is purely a scare tactic. There’s no denying that cancer is awful. But guess what? Most health insurance policies cover cancer.
Purchasing cancer insurance is just a way of paying extra to get coverage that you already have. Now you do need to be certain that you own a good health insurance policy that covers cancer. But once that’s in place you can ditch the cancer insurance and save money.
#3 Accidental Death
This one’s kind of funny, albeit in a very morbid way. Whether you die by accident or you die a natural death, you’re still dead. You can’t be double dead just because it’s on accident. Make sure that you have sufficient life insurance coverage. Once you do then call it good and move on from this unnecessary insurance.
I’ll say it again – nobody likes insurance. It costs money and we hope that we never have to use it. Despite this, I hope you see why these types of insurance are necessary and the downside you’re exposed to without them.
So what do you think? Are there any other insurance policies you think should have made this list?