Unpacking insurance: What you really need and why it matters
Life is full of surprises — and while there are good ones, like proposals and new opportunities, there are also the ones that can be physically, emotionally, and/or financially challenging, like a car accident, garage fire, or sudden illness. Thankfully, those less-than-happy surprises are often where insurance comes in, providing support and protection when unexpected disasters strike. By understanding what types of insurance are essential for you and which ones are optional, you can make informed decisions that fit your budget and lifestyle. In this article, we’ll break down the different types of insurance, identify the non-negotiables, take a look at deductibles, and explore some ways you might get the best deal when paying for your insurance.
Jump to a specific section here:
Health insurance
Auto insurance
Homeowner’s/renter’s insurance
Life insurance
Disability insurance
Long-term care insurance
Deductibles
Getting the best deal
Health insurance
Health insurance is a must-have, a safety net that helps cover medical costs such as doctors’ visits and prescription medications as well as protecting you from the expense associated with surgeries, medical emergencies, and hospital stays. According to Healthcare.gov, a three-day stint in the hospital could cost around $30,000 — more than many pre-owned cars! Without insurance, a single illness or accident could devastate your finances.
Typically, you can obtain health insurance through your employer during open enrollment periods, which are specified by the insurance providers. If your employer doesn’t offer health insurance or if you’re unemployed, you can explore options through the Federal Health Insurance Marketplace (these plans may offer subsidies if you meet certain income and eligibility criteria) or directly from insurance companies, agents, or brokers.
We recommend you look for plans that cover essential health benefits and preventive care. Even if you’re on a tight budget, a policy with minimal coverage is better than none. If your income and other factors meet the criteria, you may be eligible for certain government programs like Medicaid.
Auto insurance
If you own a car, this is another must. Most states require drivers to have auto insurance, and even in states where it’s not mandatory, drivers are still financially responsible for any damage or injuries they cause. Here are the main types of car insurance:
- Liability insurance is required by law in most states. It covers the costs if you’re at fault in an accident, including property damage and medical expenses for the other party.
- Personal injury protection (PIP) is required in no-fault states (and worth consideration no matter where you live). PIP covers medical expenses for you and your passengers, regardless of who is at fault.
- Uninsured/underinsured motorist coverage is crucial in case you’re hit by a driver who doesn’t have enough insurance to cover the damages.
- Collision coverage is optional but highly recommended as it covers damage to your car from collisions, regardless of who is at fault.
- Comprehensive coverage is also optional but recommended, as it covers non-collision-related damage to your car, such as theft, vandalism, or natural disasters.
- Medical payment coverage (MedPay) helps pay for medical expenses for you and your passengers if you’re injured in an accident, providing an extra layer of financial protection.
Insurance costs vary based on your circumstances. It’s wise to compare several rate quotes and periodically check if you qualify for a lower rate based on factors like age, driving record, or location.
Homeowner’s/renter’s insurance
Homeowner’s insurance protects your property and belongings from damage or theft. If you don’t own your home, renter’s insurance is also important as it protects your personal belongings and provides liability coverage.
While not required by state law, homeowner’s insurance is often mandated by lenders to protect their investment. Even without a mortgage, it’s wise to have coverage to avoid paying out-of-pocket for repairs or replacements if your home is damaged or destroyed. Here are some common components of homeowner’s or renter’s insurance:
- Dwelling coverage protects the structure of your home from events like fire, wind, theft, or vandalism.
- Personal property coverage takes care of belongings such as furniture and appliances against theft, fire, and explosions.
- Other structures coverage helps with repair or replacement of structures like sheds or fences.
- Liability coverage pays for injuries or property damage you cause to others, including legal fees.
- Additional living expenses covers extra costs if you’re temporarily displaced due to covered damage.
Note: Standard policies don’t cover flood or earthquake damage, but separate insurance is available.
Renter’s insurance protects your belongings if they’re stolen or damaged by events like fire or explosions. Common renter’s insurance components:
- Personal property coverage reimburses for stolen or damaged items.
- Liability Coverage covers costs if you’re liable for injuries or property damage.
- Additional living expenses pays for extra costs if your rental becomes uninhabitable.
It’s wise to bundle your home and auto insurance with the same provider to get a discount. Always compare quotes from different insurers to find the best rate.
For additional coverage, look into umbrella insurance, which provides extra liability coverage beyond your auto, home, or renter policies. It’s useful if you have substantial assets and face a lawsuit exceeding your standard policy limits. For example, if you’re sued for $500,000 but your home insurance only covers $300,000, umbrella insurance would cover the remaining $200,000.
Life insurance
Life insurance is crucial if you have dependents who rely on your income. It provides financial support to your loved ones in case of your untimely death. However, if you’re single with no dependents, it might not be necessary.
- Whole life insurance offers both a death benefit and a cash value component, which you can access through loans or withdrawals. You can also end the policy and receive its cash value.
- Term life insurance provides coverage for a set period (10, 20, or 30 years) with stable premiums. It’s usually the most affordable option and is ideal for covering mortgages or children’s college years.
Life insurance is essential if your family depends on your income. Experts recommend a policy that pays out 10 times your annual salary. Term life insurance is generally more affordable than whole life, and sufficient for most people. Calculate how much coverage you need based on your debts, income, and future expenses.
Disability insurance
Disability insurance is often overlooked, but it’s incredibly important. It provides income if you’re unable to work due to illness or injury. Statistically, you’re more likely to need disability insurance than life insurance before retirement age, and experts highly recommend it.
Employer-provided disability insurance is a good start, but it might not be enough. Consider a supplemental policy to cover a higher percentage of your income.
Long-term care insurance
These types of insurance cover (or offset) the cost of care if you have a chronic illness or disability and need help with daily activities. The need for this optional coverage is usually more relevant as you age, and premiums can be costly.
Consider your age, family health history, and dynamic as well as your financial situation. If you have significant assets to protect, it might be worth the investment.
Deciphering deductibles
Understanding how deductibles work helps you make informed decisions about your insurance policies and manage your finances better. Put simply, a deductible is the amount of money you pay out-of-pocket, before your insurance coverage kicks in. It’s a way for insurers to share the risk with you. Below, we’ll break it down by type of insurance.
How deductibles work in auto insurance
When you file a claim for a car accident, you pay the deductible amount first, and then your insurance covers the remaining costs up to your policy limits. For example, if you have a $500 deductible and $2,000 in damages, you pay $500, and your insurer pays $1,500.
Types of auto insurance deductibles:
- Collision deductibles apply when your car is damaged in an accident.
- Comprehensive deductibles are applicable in non-collision incidents like theft, vandalism, or natural disasters.
How deductibles work in home insurance
Home insurance deductibles work similarly. If you file a claim for damage to your home, you pay the deductible amount first. For instance, if you have a $1,000 deductible and $10,000 in damage from a storm, you pay $1,000, and your insurer covers the remaining $9,000.
Types of home insurance deductibles:
- Standard deductibles are a fixed dollar amount you pay for each claim
- Percentage deductibles are based on a percentage of your home’s insured value, often used for specific risks like hurricanes or earthquakes.
How deductibles work in health insurance
Health insurance deductibles function a bit differently. You pay out-of-pocket for medical services until you reach your deductible amount. After that, your insurance starts to cover a portion of your medical expenses. For example, if you have a $1,500 deductible, you pay the first $1,500 of your medical bills, and then your insurance covers the rest, according to your policy terms.
Types of health insurance deductibles:
- Individual deductibles apply to each person covered by the policy.
- A family deductible is the total amount a family must pay out-of-pocket before insurance coverage kicks in for all members.
Using a health savings account (HSA)
An HSA (Member FDIC) is a tax-advantaged account that you can use to pay for qualified medical expenses. Contributions to an HSA are tax-deductible, and withdrawals for eligible expenses are tax-free. HSAs are typically offered through an employer and paired with a high-deductible health plan (HDHP). By using an HSA, you can save money on taxes and have funds available to cover your deductible and other out-of-pocket costs.
Choosing your deductible
When selecting a deductible, consider your financial situation and risk tolerance. Higher deductibles usually mean lower premiums, but you’ll pay more out-of-pocket if you file a claim. Conversely, lower deductibles mean higher premiums but less out-of-pocket expense when you need to use your insurance.
Tips for managing deductibles
Reassess your deductible and coverage needs annually to ensure they still align with your financial situation. If you find your deductible is too high, consider adjusting it to a lower amount when you renew your policy. This will increase your premiums but make the deductible more manageable. At that time, you could also talk with your insurance provider(s) about bundling auto and home insurance policies, as sometimes pairing the two can result in discounts — a way to help offset higher deductibles.
Getting the best deal
One of the best ways to save money on insurance is to shop around. Different providers offer different rates for the same coverage, so it’s worth taking the time to compare. Use online comparison tools to get quotes from several insurers. Once you have narrowed it down, consulting with an insurance agent can help you evaluate your personal insurance needs and budget, guiding you in selecting the right policies and appropriate coverage levels.
Ask about those discounts for bundling policies, and for other reasons, as well. Many auto insurance providers offer good driving record, new car, or anti-theft device discounts, your home insurance provider may offer a smart home or safe home discount, etc. It’s certainly worth the ask.
Your insurance needs can change, so make it a habit to review your insurance policies annually, adjusting your deductible and coverage as needed. If necessary, compare insurance providers to ensure yours is still the best fit for you.
Packing it all back up
There’s much to cover where insurance is concerned (pun intended), and we’ve unpacked a lot. We hope you now feel more confident in understanding and choosing the right coverage for your needs, as the right insurance can provide peace of mind and financial protection when you need it most. The goal is to protect yourself from financial hardship without overpaying or buying unnecessary coverage. Consider your unique situation, enlist the help of your trusted insurance professional and financial advisor, and always, always shop around to ensure you’re getting the best deal possible.
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