Insurance is not a fun thing to talk about.  Frankly, I could think of quite a few personal finance topics I’d rather write about.  But the fact is there are few things more important to your financial life than insurance. 

The very nature of insurance turns people off.  It is a defense against worst case scenarios.  No one wants to think about what happens if they die, or their house burns down, or they need to spend time in a nursing home.  It’s both scary and depressing.  And on top of that, it costs you money and takes a lot of research and paper work to get right.  Any way you look at it, becoming properly insured is not an enjoyable task.  Unfortunately, it is a necessary one.

We all know (or should know) that getting rich quickly is a myth.  Unless you plan to win the lottery or inherit a ton of money, it is almost certainly not happening.  Getting poor quickly, on the other, is just one disaster away.  Without insurance to protect you from these disasters, you are just one spouse dying, or house flood or car accident away from ruining everything you worked for financially.  You can build the strongest financial army in the world, with no debt, a huge emergency fund, a fully funded retirement account and plenty of passive income, but without the fortress of proper insurance, you are at risk of one ambush wiping you out.

Today, as much as it pains us, we are going to go over all the various types of insurance, what they entail, and who needs them.  So grab a cup of coffee or a red bull, read on, and be honest with yourself about which policies you need that you don’t yet have. 

Life Insurance

Life insurance is a form of insurance placed on the life of an individual with the benefits paid out to the named beneficiaries when that individual dies.  There are two basic types of life insurance, whole life and term life.  Here are the differences:

  • Term Life Insurance- A term policy is life coverage only.  You can buy term insurance of periods ranging from one to 30 years.  By paying a set premium each month, you insure that the named beneficiaries will receive a pre-determined amount of money upon the death of the insured.
  • Whole Life Insurance- Whole life is a form of life insurance that uses the premiums paid to invest in things like bonds, money-market accounts and stocks.  It usually is filled with outrageous commissions and fees and, unlike a term policy, will only pay out the amount of money paid in (plus anything gained in the investments) upon the death of the insured.  It is basically a glorified savings account with high fees and low return investments.

Which option is best for you?  As you can probably tell by my descriptions of each, I’m not a fan of whole life insurance.  That’s actually an understatement.  I think it is completely worthless unless you are wealthy (in which case it can be used in the same effect as a trust) or are the insurance agent making a killing on the commission.  There are MUCH better investment vehicles out there than whole life insurance.  Term insurance is the only thing that 99 percent of people need.  Just a simple policy where you pay a premium and if you die in the time frame of the policy, your dependants will receive the pre-determine amount of money.

Insurance agents are going to tell you differently.  They are going to adamantly try to sell you whole life insurance policies, despite the fact that they are not good investments.  Why?  Because they make a killing on the commissions for these policies.  Don’t buy it.  Term is almost certainly all you need.  If you are convinced you may need whole life insurance, get a second and third and fourth opinion from people outside the insurance business.

Who needs life insurance?  Surprisingly less people than you would think.  If you have dependants who rely on your salary, and you don’t yet have adequate assets to leave, you need term life insurance. 

Basically if you are married, under the age of 40 or so, and your household depends on your income, you probably need life insurance.  If you are single with no kids, are old enough to have accumulated significant assets to leave behind, or have a household that does not depend on your income, you do not need life insurance.

If you do fall into the category that needs life insurance, it is vital that you have it.  You don’t want your loved ones to have to worry about how they are going to survive on top of dealing with the grief of losing you.

How much coverage do you need?  This is something you want to speak with an advisor about, but by looking at the assets and liabilities you would leave behind you can get a pretty good idea.  The wider the disparity between your liabilities and your assets the more coverage you will need.

Disability Insurance

Long-term disability is a form of insurance often overlooked by many.  They seem to think that they are covered through workers compensation, making disability insurance unnecessary.  The problem is that workers compensation only works if you are injured on the job.  Get injured at home, or in a car accident, or on vacation and you are out of look.

Long-term disability insurance, on the other hand, will cover you no matter where or how you are hurt.  If you are too hurt or ill to work, disability insurance will pay anywhere from 60 to 90 percent of your income. 

Who needs long-term disability insurance? Anyone who is dependant on an income that is reliant on their health.  Especially those in hard labor jobs that need their physical health to do their jobs. 

Long-term Care Insurance

Maybe the most overlooked insurance there is, and also one of the most important, long-term care insurance is used to help you pay the enormous costs of living in a nursing home. 

Long-term care insurance can be used to pay most or all of your stay in a nursing home. And since these costs can be as high as $80,000 a year and rising for even an average nursing home, it is a form of insurance you don’t want to ignore.  It is estimated that one in three people will spend some time in a nursing home, and that the average length of stay is 2.8 years, so thinking it won’t happen to you is not wise.

Who needs long-term care insurance?  Personal finance guru Suze Orman recommends anyone over the age of 54 begin looking very seriously in long-term care insurance.  The longer you wait to get this insurance, the higher you premiums will be.

Home Insurance

Since home insurance is a requirement by your mortgage lender, there is no need to into too much detail here.  But it is important to make sure that your current coverage will cover you in any event that could possibly effect your home.  You don’t want to have a sudden flood and then find out floods aren’t covered in the plan you have. 

Make a list of anything that could possibly damage your home and compare it with what is covered under your insurance plan.  If anything is missing make a call and get it added.  Serious home damage that isn’t covered by insurance could be a massive hit to your finances.

Renters Insurance

Along the same lines of home insurance, renters insurance covers the personal property inside of a property that you rent.  It is extremely cheap, yet something completely overlooked by most renters.  Without it, any property destroyed in a fire, flood, earthquake, break-in or any other disaster will be your responsibility.

Having just purchased renters insurance, I can tell you it is both easy and cheap to obtain.  For about 20 dollars a month, my fiance and I are covered for up to $20,000 worth of property damage within the apartment, $5,000 for her engagement ring no matter where it is damaged or lost, and $100,000 in personal liability if someone is injured in our apartment.

If you rent a house or apartment, renters insurance is a must.

Auto Insurance

If you drive a car you are required by law to carry auto insurance.  So like home insurance there is no need to dwell on its importance.  But also like home insurance there are different levels of coverage and it is important to know how much you need.

While it may be much cheaper to purchase liability only insurance, you could be taking a serious financial risk.  Now I’m not saying liability only is never acceptable, it could be a very good option for you if you are driving a car that would cost more to repair than it is worth.  But in all other circumstances, you need to have full coverage. 

There you have it.  All the different forms of insurance you need to put a fortress around your financial army.  If there is any form of insurance on this list you need but do not have, get it.  If you have everything you need, find some spare time to shop around and make sure you are paying as little as possible for adequate coverage. 

It’s like Suze Orman always says, “Hope for the best, but plan for the worst”.  Unfortunately, disasters will happen.  By being properly insured you can make sure these disasters don’t destroy you and your loved ones financially.

Tomorrow on Centsability to Wealth we will discuss the importance of credit scores and how to improve them.  Please continue sending any questions, suggestions and story tips to centsabilitytowealth@gmail.com.