What Types of Insurance Do You Need?
The basic premise of all insurance is that you buy it before you need it. It's best to make sure you have all the right policies in place, so when some kind of disaster strikes -- and it will -- you won't be in dire financial straits. It's the true embodiment of "better safe than sorry."
Read on to understand why you need different kinds of insurance and learn about nine types of policies you should consider buying to ensure you are prepared for life and all it may bring.
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What is insurance?
Insurance is any kind of program that allows people to protect themselves from major disasters by combining their risks with other people's and paying into a pool, which will pay out money if you experience a specific kind of adversity like illness, injury, death, or car damage.
Being insured allows you to transfer the risk of a catastrophic financial loss to the insurance company. And if you don't have a policy when you need one, it could mean big trouble. The nature of insurance means you can't decide to get it once the disaster occurs and you find yourself uninsured. You should get all your policies in place while things are going swell and you're still insurable in the eyes of the insurer.
What is an insurance premium?
Usually, you pay for your insurance monthly with a pre-determined amount of money called a premium.
When you buy insurance, your money is pooled with the money of a bunch of other people who buy insurance. Insurance companies typically use a process called underwriting to decide how much money you need to put into the pool, based on the probability that you'll require a payout.
If the underwriters do their job correctly, the insurance company pays out less in coverage than the amount of premiums coming in, allowing it to be sustainable and continue insuring new people, while paying out the appropriate amounts to the insured people it already covers.
What is an insurance deductible?
Your premiums aren't the only costs you pay when you have insurance. Your policy likely has a deductible, which is the amount of money you must pay out of pocket before insurance begins providing coverage.
For example, if you have a $500 deductible on your auto insurance policy and you get into a crash that causes $400 of damage, your insurance won't pay anything because your deductible has not been met, so you're on the hook for the costs. If the damage were $1,000, you'd pay the first $500 in damages and, once your deductible is met, your insurer would pay the remaining $500.
The lower your deductible, the higher your premium costs -- and vice versa. In some cases, certain services are covered before your deductible is met. For example, your car insurance may cover windshield repairs even if you haven't met your deductible, or your health insurance may cover preventative care appointments even if you haven't met your deductible.
How do I get insurance?
Insurance can be obtained from different sources. In some cases, you can get insurance coverage through an employer. Employers commonly offer health insurance, and sometimes life insurance and disability insurance, as a workplace benefit. When you obtain insurance through an employer, you may have a choice of one or more plans that your employer has pre-selected and your employer may pay some or all of the premiums for your coverage.
You could also apply for insurance through individual insurance companies, or through insurance marketplaces or exchanges where you can compare prices from multiple insurance providers.
When you apply for insurance, you'll need to specify who you want the policy to cover. For example, you may decide to cover your entire family under the same health insurance policy -- or you may get coverage for yourself and your kids through your workplace policy while your spouse gets coverage through his or her own employer. For some types of insurance, such as auto insurance, you may need to cover everyone in your household who will drive your vehicle to ensure comprehensive protection.
Some kinds of insurance, such as life insurance, require you to select a beneficiary who will receive the payout in the event of your death. This is different from choosing who is covered under the policy. With a life insurance policy, your life can be the covered life, but your beneficiary will receive the death benefit payout when you die.
Unfortunately, there are times when you may apply for insurance and find out you are not eligible for it. For example, someone with a terminal illness may not be eligible for life insurance coverage from most insurers. If you cannot get the coverage you need, try shopping around with different insurance companies, but know that it isn't always possible to find someone who will cover you.
Laws on who can be denied coverage -- and the process for shopping for coverage -- can differ dramatically depending on what kinds of insurance you're looking for. Read on to find out more about nine common types of insurance you may want to consider buying.
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.
The specific coverage you get when you buy health insurance depends which policy you select. Your options include:
Low-deductible health plans: Low deductible health insurance plans are plans that keep your out-of-pocket costs for care low. You will pay higher premiums for these plans, since they provide more coverage. Your costs are more predictable since you'll know what your premiums are up front and you never have to worry about paying thousands of dollars if you end up needing medical services.
High-deductible health plans: High-deductible health plans (HDHPs) have low premiums, meaning you pay less up front each month just to be covered. But the trade-off is that you're responsible for covering routine basic care, because your deductible -- or the amount you pay with your own money before insurance kicks in to pay the rest-- is typically several thousand dollars. With many high-deductible health plans, you can open a Health Savings Account (HSA) and contribute pre-tax funds to it that can be used to pay for medical costs as you incur them.
Catastrophic health plans: Catastrophic health plans are the cheapest in terms of premiums, but provide virtually no coverage for care unless you incur many thousands of dollars in medical costs. The deductibles are even higher than that of a typical high-deductible plan.
Health maintenance organizations (HMOs): With an HMO network, you are restricted to receiving care from a specific network of participating doctors. These doctors are referred to as being in-network and they have agreed to accept rates for care set by your insurance company. You will need a referral from a primary care physician to see a specialist. Most HMOs define "specialist" to include anyone other than your primary care physician. This could include obstetricians, dermatologists, psychologists, chiropractors, and more.
Preferred provider organizations (PPOs): With PPOs, you don't have to get a referral to see a specialist. And while care will be cheaper if you pick a doctor who is in network, you'll have better coverage for out-of-network care than with an HMO.
Exclusive provider organizations (EPOs): EPOs don't require that you get a referral to see a specialist, but will pay nothing for out-of-network care except in emergencies.
Point-of-service plan: A point-of-service plan pays for in-network and out-of-network care, although you'll pay more if you see a doctor out-of-network. A primary care doctor will need to make referrals to specialists when needed.
Try to match your policy to your care needs out of what's available and offered to you. If you're someone who doesn't incur a lot of health expenses, a high-deductible health policy may be the most affordable solution. But if you see the doctor often for any number of reasons, get a policy with higher premiums but more comprehensive coverage and a lower deductible, so you don't go broke paying for all your services.
Under Obamacare, every health insurance plan is required to cover certain basic services before your deductible is met, like preventative care. The law also mandates insurance companies cannot charge more for a health insurance policy if the person has a pre-existing condition. The price of health insurance is based upon your age, geographic area, and whether you're a smoker. Insurers are prohibited by Obamacare from considering your gender, race, or past medical history.
Without exception, absolutely everyone needs health insurance because even a minor medical issue can become extremely expensive. Major medical issues can come with astronomical costs, as a single hospital stay or surgical procedure could cost many thousands of dollars.
You can sign up for health insurance only at certain times of the year during "open enrollment" -- which is a designated period when anyone can buy coverage -- unless you have a qualifying event, such as losing coverage because of a divorce or job change. Visit Healthcare.gov to find out when open enrollment is on the Obamacare exchanges, or check with your employer to see when you can sign up if your employer provides insurance as a job benefit.
2. Dental insurance
Dental insurance is typically separate from medical insurance, but it's not any less mandatory. Anyone can suffer a toothache, gum disease, cavity or even a broken tooth, all of which are very expensive to treat. Secondly, everyone should be visiting a dentist twice a year for cleaning and checkups.
You can get dental insurance through an employer if your company offers this as a benefit. Otherwise, you can independently buy dental insurance from providers. Unfortunately, there are no subsidies to help you afford dental insurance premiums, like Obamacare does for medical insurance.
You'll need to shop around for a policy that provides appropriate coverage. Dental insurance options include:
Discount plans: With a dental discount plan, your plan doesn't pay for a portion of your care. Instead you get discounted services by seeing a dentist within a participating network. You pay a smaller cost to be covered under a discount plan than for other types of dental insurance, but you'll also typically pay more out of pocket.
HMO: You must pick a dentist who will be your primary care provider and there's no coverage for out-of-network dentists.
Dental PPO (DPPO): You can visit in or out-of-network dentists, but in-network dentists will be cheaper.
Fee-for-service: Like with a DPPO, you can visit any dentist and your insurance will pay a percentage of coverage. However, fee-for-service dentists typically aren't reimbursed as much from the insurance as dentists participating in a PPO plan so you may incur more out-of-pocket costs.
Like with health insurance, the more your insurance pays toward your care, the higher the premium costs. And if you want to see a particular dentist, you should try to find an insurer that lists your dentist as an in-network provider. You can ask your dentist which insurance carriers they work with and try to buy a policy from that insurer.
3. 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.
4. 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.
There are many unscrupulous life insurance salespeople who sell policies that earn them high commissions but that may not be right for you. To protect yourself, be sure to shop from a reliable company and check with your state's insurance commissioner to find out if the company has been the subject of complaints. Buying directly from a trusted insurer or obtaining a life insurance policy through your employer is typically a safer bet than getting a policy from a salesperson, but if you do work with someone selling coverage, ask up front what commissions they'll be paid.
5. Pet insurance
If you have pets, you should have insurance for them. Animals can encounter expensive health issues, and there are many advanced treatments available for serious ailments in pets. In fact, animals can have chemotherapy for cancer, heart surgery for heart disease, hip replacements, and many other treatments available in human medicine.
The policy will be more affordable if you buy it while your pet is still young. Pet insurance policies also vary in what they cover. You could get an accident-only policy to pay out in case your pet gets hit by a car or hurt in another type of accident. You could get an accident and illness policy to pay in case your pet develops a serious illness or is hurt in an accident. Or, you can get a comprehensive policy that covers accidents, illness, and routine care.
Pet insurance policies almost always exclude pre-existing conditions, and some exclude genetic disorders or specific breeds known to have health problems, such as French bulldogs.
Shop carefully to see what each policy covers. And, just as with human health insurance, a policy with a higher deductible will cost less in premiums but require you to pay out more when your pet needs care. You should also check with consumer websites like TrustPilot and the Better Business Bureau before choosing a pet insurance carrier, as some insurers make lots of promises but end up denying claims and not providing the promised coverage.
6. 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.
7. 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.
8. 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.
9. 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.
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.
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