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7 types of insurance everybody needs

Which insurance policies are right for you?

These are the basic types of insurance most people need. If you have a special situation — such as running a business or working in a profession where you could be sued for malpractice — you may need additional coverage.

Make sure you insure against all the risks you may face in life, because you don’t want to experience catastrophic financial loss on top of the stress that comes when an emergency happens. Here are the basic categories of insurance everyone must and should have:

 

 

1. Health insurance

Health insurance is the single most important type of insurance you’ll ever buy. That’s because if you don’t have health insurance and something goes wrong, it’s not just your money at risk — it’s your life.

Health insurance is intended to pay for the costs of medical care. Many people get health insurance through employers who subsidize premiums, meaning the employer pays the bulk of your premium, and you chip in a little with each paycheck.

If you don’t have employer-sponsored health insurance, you’ll need to buy health insurance on the individual market. Thanks to the Affordable Care Act (or Obamacare), you may be able to buy subsidized insurance on a state or federal exchange and get tax credits that help you afford the cost of monthly premiums.

2. Disability insurance

Disability insurance is intended to replace your income if something happens that makes you unable to work. There are both long- and short-term disability policies, with short-term disability coverage typically replacing a larger portion of your income.

Disability policies have a specific definition of what it means to be disabled, and they pay only a percentage of the salary you were earning prior to becoming disabled. This typically ranges from about 60% to 70% of base salary for a short-term disability policy and between 40% and 60% of base salary for a long-term policy. Policies also set a maximum cap on how much you can receive. 

Disability insurance can be provided by or purchased through an employer, or you could buy a policy on the individual market. Many people forgo disability insurance because policies can be costly. Your premiums are generally equal to a percentage of income, but many factors are taken into account including gender and health history. The waiting period, or the time you have to be without income due to disability, will also affect premium costs. The longer the time period before disability insurance kicks in, the lower the premiums will be.

If you shop for a disability policy, look for coverage that has a broad definition of disabled and that replaces a big enough portion of income, with a short waiting period, if any. Going without disability insurance can put you into a difficult situation. While you can apply for Social Security Disability benefits, these benefits are available for long-term disabilities only and can be very difficult to qualify for. If you can’t qualify for Social Security benefits and haven’t purchased disability insurance, you may have no income at all if you can’t work. 

3. Life insurance

Life insurance pays out money called a death benefit to a designated beneficiary when you die. You can name people, companies, or trusts as beneficiaries, and you can have more than one beneficiary who will split your death benefit in accordance with your instructions. 

If anyone relies on your income, you need life insurance. If anyone depends on you for services — such as your family if you’re a stay-at-home spouse or aging relatives if you’re a caregiver — you need life insurance. If you have business partners who will need to buy out your share of the business if you pass away, you need life insurance. And since the average funeral costs between $7,000 and $9,000, you even need life insurance if you want to be buried without sending your family into debt. 

The costs of life insurance vary depending upon the amount of the death benefit, as well as your age, health status, and other risk factors. If your hobby is skydiving or swimming with sharks, you’ll pay more. You will typically need to undergo a medical exam when you apply for a life insurance policy and answer a questionnaire about your hobbies and habits including whether you’ve ever been a smoker or used illegal drugs. 

The kind of life insurance you buy also matters. For most people, a term life insurance policy is the right one to get. Term life insurance is in effect for a set period of time, such as 20 or 30 years. If you die while the policy covers you, the death benefit pays out to whomever you designated as a beneficiary. If you don’t, no benefits are paid. The idea behind term life insurance is that you have a policy when you need it — when your kids are young or your spouse needs your income. By the time the term expires, your kids should be grown and you should have savings in the bank so your spouse no longer relies on your paycheck. 

You can also buy whole life insurance. Whole life insurance is more expensive than term life insurance, and not just because it can remain in effect for your entire life as long as you pay premiums. Premiums paid for whole life coverage are more than what it costs just to insure you, and some of the money is invested. Whole life policies thus acquire a cash value, which you could borrow against by filling out a simple form or access by selling your policy to investors using a service that facilitates life settlements. 

Most experts agree that whole life insurance isn’t a great investment. But it may make sense if you will always need coverage. For example, if you want to ensure a disabled child receives a death benefit no matter when you die, you may decide to buy a whole life policy. If you do purchase a whole life policy, shop carefully and ask about fees because many policies come with high costs.  

4. Homeowners or renters insurance 

If you own a home, you need homeowners insurance. If you rent your place, you need renters insurance. You need this insurance unless you can afford to pay out of pocket to replace every single thing you own. You also need it to shield you from liability in case someone else gets hurt on your property. 

Homeowners and renters insurance policies contain two different components: Liability coverage and property coverage. Liability coverage pays for costs associated with an injury on your property. If someone slips and falls on your steps, your liability policy will pay for your defense if they sue you. It will also pay for any damages the injured person is awarded. Liability coverage also pays out if your dog bites someone and you’re sued. 

Property coverage pays if something happens to your home or your possessions within it. If your house burns down or your roof is destroyed by a hail storm or your belongings are stolen, your insurance will pay you. Typically, this insurance also covers you if you’re robbed outside of your home. If your laptop is stolen out of your car, the insurance should cover it. 

You can get market value or replacement value property coverage. Market value would pay what your home or possessions are worth on the market. If your couch is 10 years old, your insurer would pay only a small amount for the couch because it’s not worth much — even though you probably wouldn’t actually be able to buy a new couch with the money the insurer gives you. If you get replacement value coverage, the insurance pays to replace the possessions you lost or pays the cost to rebuild your home. 

You’ll need to choose how much liability protection and property coverage you want to buy. The more coverage you have, the higher the premiums. You’ll also need to choose your deductible. As is typical for insurance, a lower deductible means higher premiums, while a higher deductible means you pay more out of pocket if something happens, but your regular premiums are lower. 

Most policies also impose certain limits on how much they’ll pay for lost possessions. For example, your insurance policy may cover up to $2,500 in jewelry — but if you have a $25,000 engagement ring, you’d need add-on coverage called a rider on the policy to have it fully covered. You should ask your insurance agent exactly what the coverage limits are if you have any especially valuable possessions. 

5. Flood insurance

Homeowners insurance covers most sources of loss to your home, but policies typically exclude floods.

If you need flood insurance, you’ll likely get it from the National Flood Insurance Program (NFIP), which provides subsidized flood insurance. You need to find an NFIP-participating agent to get covered. In some but not all states, you could instead buy coverage through a private insurer. The option to buy private flood insurance policies is relatively new and may not be available where you live. There are also risks with private policies that can be avoided by using the NFIP program, including the possibility that your policy won’t be renewed and you’ll be left without coverage when you need it. 

If you live in a flood zone as determined by FEMA flood maps, your lender will require you to buy flood insurance if you have a mortgage. Renters should also purchase flood insurance to protect their possessions in case of a flood. 

Even if you don’t live in a flood zone, if you’re concerned about flooding or think your property might be declared a flood zone at some time in the future, you should buy flood insurance. Otherwise, you’ll have no coverage for your property or possessions if your home floods. 

6. Car insurance

Most people are familiar with auto insurance, as you’re required by law to have it in order to drive. In fact, driving with no insurance or registering a vehicle without insurance can lead to criminal charges. 

Each state sets its own rules for what car insurance you’re required to have. Typically, you need a liability insurance policy, which pays out if you injure someone or damage someone else’s property. If you cause an accident, your liability insurance pays for costs of defending you against a lawsuit, and also pays out compensation as part of a settlement or awarded damages in a lawsuit. Liability policies don’t pay for losses you incur when you damage your vehicle — they pay for losses you cause others to incur. 

In 15 states, you’re also required to buy personal injury protection (PIP). These states are called no-fault states, and if you get into an accident while driving in one of these states, you don’t file a claim with the other driver’s insurer for compensation for minor injuries. Rather, your own insurance pays if you get hurt, unless the injury was catastrophic. Your PIP coverage pays for your own injury or loss of wages, up to a set limit, regardless of who was responsible for the accident.

Some states also require that you buy uninsured or underinsured motorist coverage. Uninsured motorist coverage pays for losses that an uninsured driver causes, that would have been covered by their insurance if they had it. Underinsured coverage pays for uncompensated losses caused by someone with too little insurance. If your state doesn’t require uninsured or underinsured motorist coverage, you can still choose to buy it and likely should because getting into an accident with an uninsured driver could lead to thousands of dollars in uncovered losses.  

You also have the choice to opt for additional coverage. For example, you can buy comprehensive coverage to pay for repairs or replacement of your vehicle if you cause an accident, a tree falls on your car, it’s stolen, or something else happens to it. If you have a car loan, you’ll probably be required to buy this. And you can buy rental car coverage so your insurer pays for a rental car if your vehicle is damaged in an accident and you need to wait for repairs. 

You need to at least have the minimum auto insurance required by your state. You should also have comprehensive coverage unless your car is very inexpensive and you could easily replace it. 

The amount of coverage you have, along with your deductible, determines your premiums. Insurers also consider your age, gender, driving record, marital status, and other factors to assess whether you’re a risky driver or not. Even the color and make of your vehicle can affect premium costs. If you’re considered to be a high-risk driver, you will pay more for coverage.

7. Umbrella insurance 

Finally, you may decide you want umbrella insurance. An umbrella policy provides coverage above and beyond the liability protections provided by all other insurance policies.

If your homeowners or automobile policy provides just $250,000 in coverage and you’re sued for $1 million, the umbrella policy would pay the outstanding liabilities.  It’s important to have umbrella insurance to protect your assets and to protect you from having your wages garnished if you’re successfully sued.

Buying an umbrella policy can be more affordable than significantly increasing coverage limits on your homeowners and auto insurance. However, your insurer will likely require you to maintain at least a set minimum amount of liability coverage on the other policies. And umbrella insurance only kicks in once those policies have paid out up to policy limits. It’s basically your “if all else fails” insurance. And if you’re someone who will sleep better at night knowing you’re protected all the way, this is for you, if you can afford it without breaking your budget.

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