2 types of insurance are absolutely necessary, while others can be skipped.

2 types of insurance are absolutely necessary, while others can be skipped.

Not everyone requires all types of insurance. There are hundreds of different types of insurance, some of which are extremely obscure.

Celebrity sommeliers will occasionally insure their noses and palates. Wedding insurance is available for nervous brides. Kidnapping insurance and even alien abduction insurance are available to the truly paranoid.

Nonetheless, everyone should have at least two types of insurance, and many should have one or more specialized policy types. Before you go on an insurance shopping spree or decide to forego insurance altogether, make sure you understand all of the following insurance types.

Everyone requires insurance at all times.

Everyone, from the cradle to the grave, should have health and property insurance.

That doesn’t mean everyone requires the same types of each. Your insurance requirements vary depending on your circumstances.

Health Coverage

You must have health insurance regardless of your employment benefits.

When a medical emergency occurs, it is too late to obtain affordable coverage. You don’t want to be seriously injured or face a life-threatening illness with no way to pay for medical bills.

Your coverage could be as simple as a low-cost high-deductible policy combined with a Lively health savings account (HSA). It could also be a full-fledged policy with all the bells and whistles.

You don’t have health insurance through your job? No worries — there is a plethora of health insurance options available to those who do not have employer benefits. Among the options are:

  • Marketplaces for health insurance under the Affordable Care Act
  • Marketplaces for private insurance
  • Association health insurance plans
  • Using a low-cost, high-deductible policy in conjunction with an HSA

I’ve even seen high-skilled employees work an extra part-time job just to get health insurance.

Yes, self-employed workers have a variety of health insurance options as well.

Purchase a gap coverage policy if you are between jobs. They are not expensive, but they help you sleep at night and keep you safe. Accidents can happen at any time, not just when you and your insurance coverage are most convenient.

Insurance for Real Estate (Homeowners or Renters Insurance)

The majority of homeowners have homeowners insurance. If they have a mortgage, they have no choice; the terms of their loan require it.

Homeowners insurance protects both your home and your personal belongings.

If a tree branch falls through your roof during a storm, you’re (usually) covered. If a branch falls on your prized 70-inch ultra-HD television, your homeowners insurance policy will usually cover the personal property damage as well.

And, of course, fire. According to HomeAdvisor, the average home fire costs $12,653, but when an entire structure burns down with everything inside, that total can rise to six or even seven figures.

While homeowners almost always have insurance, renters frequently go uninsured at their peril.

Renters insurance is typically less expensive than homeowners insurance because it covers significantly less total property. Renters insurance is frequently available for less than $100 per year from companies such as Lemonade. Your premium is determined by the amount of renters insurance you require.

As a renter, ask yourself a simple question: If my house or apartment building burned down and I lost everything, would it financially cripple me? It’s difficult to imagine someone dismissing that with a “No big deal.”

By all means, look into ways to save money on homeowners or renters insurance. Purchase as much or as little as you desire. However, purchase it.

Pro tip: If you’ve had the same homeowner’s policy for two or more years, it’s time to shop around for a better deal. This ensures you get the best price for your desired coverage. In just a few minutes, PolicyGenius will provide you with quotes from tens of insurers.

Insurance that some people require on occasion

Although you may not require nose and palate insurance like an expert sommelier, you will most likely require at least a few of the following insurance types.

None of these should be dismissed out of hand. Before deciding you don’t need insurance, make sure you truly understand what it covers and your own vulnerability.

Automobile Insurance

Anyone who owns or leases a car is required by law to have auto insurance. You must maintain liability coverage, which covers the other driver’s car if you hit them.

You can also purchase collision coverage, which protects your own vehicle in the event of a collision. Otherwise, you must pay out of pocket to have your car repaired after a fender bender.

Fortunately, you have a variety of other options for saving money on auto insurance besides reducing coverage.

For example, insurers frequently provide discounts to drivers with excellent credit. Students are also given a break if they maintain good grades. Some insurers will even give you a discount if you install a tracker in your vehicle.

You can reduce your need for auto insurance by reducing the number of vehicles you insure or even going without a vehicle entirely. This means not only no car payment, but also no auto insurance, gas, maintenance, parking, speeding tickets, or any of the other car ownership costs, which according to AAA average $9,282 per year.

If you’re looking for new auto insurance, make sure to check out our list of the best car insurance companies.

Insurance for Disability

While the majority of Americans have health insurance, far fewer have disability coverage. Many people are unaware of the distinction.

Health insurance pays for medical expenses. Disability insurance compensates you for lost wages if you are unable to work due to a bodily injury.

Disability is more likely than we care to admit.

According to Simply Insurance, a 35-year-old has a 50% chance of becoming disabled for 90 days or more before reaching the age of 65. Each year, approximately 5% of working Americans will experience a non-work-related short-term disability.

A sudden disability can have disastrous consequences. According to the Simply Insurance report, disability causes nearly half (46%) of foreclosures.

There are two types of disability insurance: short-term disability coverage and long-term disability coverage.

Short-term disability, as the name implies, replaces a portion of your income for a limited time period, usually up to 26 weeks. Long-term disability insurance protects you from the possibility of being unable to work for years.

Some disability policies cover you for a set period of time, such as up to ten years. Others will insure you until you reach the age of retirement.

The longer the policy coverage and the higher the income included, the more expensive the policy. Premiums are also affected by the level of risk in your profession.

Insurance for life

Although the term “life insurance” is easier to market than “untimely death insurance,” the latter is more accurate.

Not everyone requires life insurance, but many do. The primary reason for purchasing life insurance is the possibility that your family would face financial difficulties if you died.

Some disability policies cover you for a set period of time, such as up to ten years. Others will insure you until you reach the age of retirement.

A household with one breadwinner is the most obvious example, but even families with two earners typically face hardship if they suddenly lose one income.

Life insurance policies are available from a variety of insurers. Term and whole life insurance are the two broad categories.

When you purchase term life insurance from a company like Ladder, you are insuring yourself against death for a set period of time (the “term”).

If you die during that period, the life insurance company will pay your family the promised claim. If you live to the end of the term, the policy will expire and the insurance company will keep your premium.

Whole life insurance, on the other hand, includes a savings component.A portion of your premium goes toward a savings or investment account, which your family receives upon your death, regardless of your age. Some policies also allow the money to be released if you reach a certain advanced age, such as 100.

In general, young single people with no dependents do not require life insurance. Married couples and families who rely on one or both partners’ incomes for survival require life insurance.

Flood Protection Insurance

The majority of homes are not in a flood plain, but those that are should have flood insurance.

This fact is not lost on mortgage lenders, who, according to national databases, require flood insurance for all homes in flood plains.

Even properties that are not in a “registered” flood plain face a higher risk of flooding than most. My father’s house is not in a flood plain, but it is situated on a hill, and the basement floods whenever storms or rainfall reach a critical mass.

Many New Orleans residents lacked flood insurance because their homes were not technically in a flood plain. When the levees failed during Hurricane Katrina, those homeowners found out the hard way that their homeowners insurance did not cover flood damage.

If your house is low on the local water table or you have other reasons to believe it is vulnerable to flooding during unusually severe storms, consider purchasing flood insurance. Because your home is not in a flood plain, you may find them extremely affordable.

Title Protection

When you purchase a home, your mortgage lender will require you to purchase title insurance. This insurance protects them, not you.

If you don’t get title insurance for yourself, you might answer the door one day to find a stranger claiming to own your house and asking you to please leave.

Title disputes are typically fought in court by expensive attorneys representing both sides over who technically owns the property.

Fortunately, title insurance policies are reasonably priced. You insure against any claims against your legal ownership of your home for a one-time fee.

Annuities

Annuities are a strange combination of insurance and investing. They provide an income floor in retirement, protecting you from outliving your nest egg.

They work as follows: while you are still working, you purchase an annuity in the form of a lump sum payment or a series of regular payments. While you continue to work, the insurance company holds the money and invests it.

After you retire, you notify the insurance company that you want to begin receiving payments, which initiates “annuitization.” They begin sending you monthly payments based on the terms of your agreement.

Straight life annuities continue to pay you until you die. Even if you live to the age of 120 and outlive the money you put in, the annuity will continue to pay you.

Other annuities pay for a set period of time regardless of when you die, while others pay for as long as you or your spouse live.

Many people find comfort in the idea of guaranteed lifetime payments in today’s world of disappearing pensions, where responsibility for your retirement planning has shifted to you.

Annuities are not appropriate for everyone. And, of course, the insurance company usually wins in the end. However, for many people, annuities can provide the peace of mind required to retire.

Specific Valuables Insurance

My wife and I own almost no valuable physical objects. I paid $200 for our 46-inch LED TV. The furniture in our apartment was provided by my wife’s employer. My laptop is by far my most valuable possession, and even it will lose nearly all of its value in three years.

My wife’s engagement ring, on the other hand, is a family heirloom worth many times the combined value of all of our other possessions. As a result, we insure it separately.

Normally, you can add specific valuables to your homeowners or renters insurance policy with a special inclusion. It adds a small fee to your annual premium, but nothing to worry about.

We don’t have homeowners or renters insurance because we live overseas in employer-provided furnished housing. (We are the lone exception to the above-mentioned renters insurance rule.) That means we need a policy tailored to our one valuable possession.

Umbrella Coverage

Most insurance policies provide coverage for a specific need up to a certain limit. For example, your auto insurance covers your liability in a car accident up to a certain dollar amount.

Umbrella insurance extends your liability coverage beyond the limits of your specific insurance coverage.

Assume you were in a car accident and left the road, causing $500,000 in damage to a street-front office building. Your auto insurance policy only covers a liability of $200,000, leaving you liable for the remaining $300,000.

Without umbrella insurance, the building owner could sue you and obtain a $300,000 judgment against you, which they could deduct from your assets and income.

Your provider picks up the tab with umbrella insurance.

Insurance for Pets

Although many pet owners pay veterinary bills out of pocket, others believe that if they insure their own health, they should also insure their pet’s health.

Enter pet insurance companies such as Embrace or Fetch by The Dodo. It pays for your pet’s veterinary care if they become ill or injured. Coverage is almost as diverse as human health insurance.

Make no mistake: the North American Pet Health Insurance Association estimates that the market is worth $1.2 billion.

If you decide to purchase pet insurance, do your research and be wary of sleazy sales tactics that frame insurance options in terms of how much you love your pet.

Insurance for Self-Employed and Entrepreneurs

People who work for themselves require more types of insurance than the average person.

Most businesses require errors and omissions (E&O) insurance, also known as professional liability insurance, in the event that they are sued for an error. These policies differ greatly by industry.

Workers’ compensation insurance may be required if you have employees. Employees in low-risk office jobs may slip and fall, develop carpal tunnel syndrome, or suffer another work-related injury and sue you.

If you sell physical products, you may require product liability insurance in the event that someone is injured while using your product.

Unless you run a home-based virtual business, you need property insurance for your business space.

The list goes on and on. Data breach insurance, commercial vehicle insurance, and possibly directors and officers insurance are all possibilities.

Many small businesses purchase key person life insurance because they rely on a few irreplaceable employees. It compensates the surviving business owners if one of those key people dies.

Alternatives to Insurance

Depending on your profession, family status, and other circumstances, you may require certain core insurance policies.

However, insurance can provide one of several solutions to the same problem in some cases. There are some types of insurance that you can avoid if you have a backup plan in place.

Large Cash Reserves

Many of the insurance policies mentioned above cover some kind of temporary, low-cost setback.

For example, short-term disability insurance frequently covers a portion of your living expenses for a period of six months. But, if you have a six-month emergency fund set aside, do you really need short-term disability insurance?

Your emergency fund would not only cover that period, but it would also cover any other emergency, not just a temporary disability.

Indeed, many financial experts advise treating your emergency fund as if it were an insurance policy.

Your savings account will not cover the $250,000 in damages caused by totaling someone’s Lamborghini. However, it can be used in place of other types of insurance designed to protect against unexpected expenses or loss of income.

Pro tip: Start an emergency fund today if you don’t already have one by opening a high-yield savings account with an online bank like CIT Bank.

Liquid Asset Layers for a Deeper Emergency Fund

As part of my emergency fund, I keep some cash on hand. But, as a relatively aggressive investor, I can’t bear the thought of tens of thousands of dollars collecting dust and losing money to inflation.

As a result, I keep my emergency fund in multiple layers. Along with some cash, I keep some in a money market account. I also have some US Treasury bonds that I can easily liquidate through a Treasury bond ETF. I also keep a few other low-risk, short-term investments where I can get money quickly if necessary.

However, I do not stop with investments. I also approach the issue of emergency cash access from a different angle: credit.

Credit Lines Unused

By keeping a variety of credit available, such as low-interest credit cards, home equity loans, and other lines of credit, you add another layer of protection against the unexpected.

In many cases, you can open these cards or credit lines for free and only pay interest if you keep a balance.

Of course, this is not something you should do.

Rather than paying insurance premiums year after year and hoping you never need it, consider layering on multiple sources of funds that you can access in an emergency.

Accounts that are tax-sheltered

Some tax-sheltered accounts are more versatile than others. Some work in tandem with insurance savings.

As previously mentioned, Lively allows you to combine a low-cost, high-deductible health insurance plan with an HSA.

You save money on your insurance policy, which you can then put into your HSA and keep for yourself, taking advantage of three tax breaks: Contributions are deductible from your income tax bill, they grow tax-free, and withdrawals are tax-free.

The money won’t go to waste because you can bet you’ll have medical bills when you retire. HSAs can be used as an additional retirement account.

When it comes to retirement accounts, your Roth IRA has a lot of options. Contributions to a Roth IRA can be withdrawn tax-free at any time.

Consider investing your money in these tax-sheltered accounts rather than lining the pockets of insurance companies.

Prioritize Financial Independence

People either love or despise the FIRE movement (financial independence, retire early). However, few people fully comprehend all of its financial implications and the FIRE lifestyle’s hidden benefits.

Financial independence in this context refers to the ability to cover your living expenses solely through passive income streams. People who have achieved it are no longer required to work in order to pay their bills.

I know a couple who became financially independent in their early thirties. As a result, they don’t require many of the insurance types listed above, which their peers do.

They do not, for example, require life insurance. If one partner dies, the other will continue to earn the same amount of money because it is generated by their joint investments rather than employment income.

For the same reason, they do not require disability insurance. Yes, both partners currently work, but neither works for a living; they work because they love it.

The couple also does not require annuities. They already have enough dividend and rental income to last forever.

All of this means they can avoid paying insurance premiums and instead invest their money to become even wealthier.

SEE ALSO – 3 Reasons Why You Should Get Health Insurance

Last Word

Everyone requires health and property insurance at all times.

Most people will also require at least one of the other types of insurance listed above. Auto insurance is required for drivers. Parents with young children usually require life insurance.

Understand when to spend more money on a comprehensive policy and when to save and invest your money elsewhere. In some cases, putting money into an emergency fund or income-producing assets makes more sense than paying an insurance company for coverage.

However, you should always have a plan in place for emergencies, which can range from health issues to car accidents to lawsuits and beyond. You don’t need every type of insurance, but you do need an emergency plan for every situation.

 

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