With the recent events of Hurricane Sandy in the New Jersey / New York area, it just reminded me of how important having the proper insurance in place is part of a solid financial plan. We will all have storms that come into our lives at some point. Illness, accidents, natural disasters, and God forbid the unexpected death of a loved one… all of these can all catch us off-guard.
My parents lived through the storms of my Dad being in a terrible car wreck. It took several years to get back to a place of normalcy. I’ve dealt with Crohn’s disease since I was 14 years old and have had dozens of major surgeries. Without the proper health insurance, my parents would have been toast financially when I was a child, and I would have been bankrupted as an adult without preparing for the cost of treating the disease through the proper health insurance plan and leveraging an HSA.
So there are some “must have” types of insurance and some types to avoid. In this post I want to outline the 7 types of “must have” insurance and in later posts talk about the types to avoid. This info is from what is taught in Dave Ramsey’s Financial Peace University classes and what I recommend in one-on-one coaching sessions.
Key things to understand and remember about insurance in general:
- Insurance is there to protect what you have, not to make you wealthy.
- Insurance is used to transfer the financial risk of events that we can’t handle on our own using our emergency fund. We want to let the insurance company bear the risk of the catastrophic events that would bankrupt us if we had to handle them.
- Think higher deductibles, lower premiums when dealing with insurance. That is how wealthy people think!
7 types of insurance that you need:
Homeowners’s or Renter’s: Homeowner’s coverage should guarantee replacement costs. If you have “extended” replacement cost coverage, you may not have enough coverage to actually replace your home and all of your possessions. If you do have “extended” replacement coverage, make sure you always know exactly what the maximum benefit of your coverage is in relationship to the value of your home. If you rent an apartment or home, you should have renter’s insurance to cover the value of your stuff… e.g furniture, jewelry etc.
Auto: On older cars consider saving money by dropping your collision coverage if you can afford to buy another car out-of-pocket from the emergency fund.
(On Homeowner’s, Renter’s, and Auto raise your deductible if you have a full emergency fund and carry adequate liability insurance. Always carry good liability insurance on your home and car… at least $500,000. The difference is only pennies a month and could save you from going bankrupt if you find yourself at fault for a major accident. Once you have some assets accumulated, getting an Umbrella Policy is a smart idea. It picks up where your home and auto policies leave off.)
Health: In the effort to do things that wealthy people do, again raise your deductible to bring your premiums down. Increase your stop-loss amount, but don’t touch the maximum pay amount from your insurance company. If an HSA is an option with your health plan, investigate it to see if it makes sense for you and your family. My wife and leverage an HSA and it has been amazing.
Disability: This is one of the most under-insured areas for individuals. Disability insurance is designed to replace income lost due to a short-term or permanent disability. You should buy occupational disability insurance that pays if you can’t perform the job you were trained or educated to do. Stay away from short-term policies (five years or less). You will leverage your fully funded emergency fund for this.
Long-Term Care: This is a must-have for anyone 60 years or older. LTC insurance is for assisted living facilities, in-home care, and nursing homes. The stats say that it is not needed until you are 60. Of people turning 65 today, 69% will need a form of long-term care.
Identify Theft Protection: Only buy policies that provide clean-up services. Move the risk to the insurance company because it is well worth it. You could spend hundreds of hours attempting to clean-up a mess from your identity being stolen. If the policy only provides credit report monitoring, it is no good. You can do that yourself.
Life: Insurance is not a permanent need, so a good term policy will give you time to become self-insured via your emergency fund. Only buy term life insurance and never mix investments with your insurance. You should get ten times your income. This goes for the corporate executive as well as the stay-at-home mom.
Questions: Do you have adequate coverage in all of these 7 areas? Leave comments below.