The insurance world can get complicated very quickly. There are many products with many different types of purposes. But it’s important to know what insurance products are necessary for you and what levels of coverage are appropriate.
The following list is generally applicable for most American households. Your needs will vary based on unique aspects of your family situation and financial status. But, by having these coverages, you will protect against the adversity that life tends to throw our way.
Health Insurance
The most common cause of bankruptcy in the United States is medical debt. The medical industry is highly regulated and the supply is frequently constrained by rules set out by the American Medical Association. The result is increasing prices for us with each passing year.
An event like a hospitalization can cost thousands of dollars out of pocket even with health insurance. Without insurance, we’re talking about tens of thousands or even more. A cancer diagnosis can also incur financially catastrophic costs.
One client of mine sadly lost a young child after a tragic accident. They ended up owing nearly half a million dollars in medical bills. The only option they had was bankruptcy at that point.
Health insurance helps to mitigate these extreme costs. Different plans and providers have different types of coverage levels, deductibles, maximum-out-of-pocket costs, etc. But something is better than nothing if that’s what you have now.
For those whose jobs do not offer health insurance, an alternative is co-op healthshare organizations. Christian Healthcare Ministries, Samaritan Ministries, Liberty Healthshare, and Medi-Share are some common choices for people without employer-sponsored plans.
Beware that these plans operate differently than regular health insurance. So look at how they work before signing up. But they have been around for several decades with many success stories.
Homeowner/Renter Insurance
As much as we think of our home as a place of security, sometimes life breaks through the walls. Houses get broken into. Apartment buildings catch on fire. Hurricanes, tornadoes, floods, and earthquakes destroy entire neighborhoods.
These are things we cannot control. But we can control our preparedness for them. Having proper homeowner/renters insurance policies protects your family against these adverse events.
For homeowners, it is important to make sure your policy covers both contents and your dwelling. Your lender (if you have a mortgage) will also likely want you to keep the coverage level close to the house’s fair market value.
Especially in the past 2 years, the market has shot up drastically. So it may be time to assess your coverage level to ensure you protect the equity. In many situations, if your coverage drops below a certain level (often 80% of the home’s value), your insurance company may reduce any payout based on the shortage in coverage.
Having insurance for your contents is also critical for renters. Your landlord’s policy likely does not cover your contents; only the landlord’s property. If there is an adverse event in your rental home, it is your responsibility to protect your belongings against casualty or theft loss.
Auto Insurance
Driving a car is one of the most dangerous activities we do. Think about it. You’re hauling along at 65mph in a one-ton hunk of metal. Things happen on the road, whether it’s by our own negligence or by others. Like medical bills, the costs of a car crash can also add up quickly.
Let’s say there is a four-car crash at an intersection. And let’s say each of these cars is between a year and a couple of years old. That’s a lot of value getting destroyed. Especially when we’re dealing with trucks and SUVs, we’re talking $40,000, $50,000 or more in value that takes a hit.
If the crash is your fault, your insurance has to pay that out to the other drivers for their loss. But let’s say you only have state minimum coverage levels. In Virginia, the minimum liability limits are $30,000/$60,000/$20,000 (starting January 1, 2022).
For those who don’t know what these numbers mean, each corresponds to a specific type of payout the insurance company makes in a covered event. With these liability levels, bodily injury or death coverage is $30,000. The maximum for any single incident for bodily injury or death is $60,000. And the maximum in property damage coverage is $20,000.
Even a one-car crash can easily exceed these liability limits. So it’s important to have adequate auto insurance to ensure you don’t have to pay the excess out of pocket. A common recommendation by financial planners is for liability limits of $100,000/$300,000/$100,000.
Talk to your insurance agent about having appropriate coverage levels, or use a broker to shop for rates.
Identity Theft Insurance
Identity theft is one of the most common forms of crime in our society today. And it is only becoming more common. Fortunately, you can protect yourself by taking appropriate precautions and covering your family with identity theft protection insurance.
A good plan will include information monitoring, reimbursement of unrecoverable losses, and (most importantly) restoration services. The latter is particularly critical, as some companies that advertise their service do not do the restoration for you. Rather, they merely give a manual on how to do it.
That means you end up doing all the work. And life doesn’t stop for you to devote all the working hours to do that. But a plan that devotes a representative to work on your behalf will ease the burden on you.
Two plans that I know of that do the restoration on your behalf are Zander ID Theft Protection and ID Shield. Both are reputable companies with a long history. To learn more about identity theft and what you can do about it, click here to read my article devoted to the subject.
Life Insurance
This type of insurance is really important for married couples and those with dependents. Single people without any dependents don’t really need life insurance. But if you’re young enough, it may be a good idea to take out a good policy anyways while the price is low.
Life insurance benefits replace an economic value to a household in the event of unexpected death. If a husband or wife dies and leaves the other spouse and/or kids behind, life insurance will fill in the gaps and ease the financial burden on the family.
I only recommend using term life insurance. It is far less expensive than cash-value life insurance like whole life, variable life, or universal life insurance. These other types of plans have a lot more fees built into them and lock your money inside the plan.
That is, unless you want to borrow your own money from the cash value. Which, if you’re seeking out the path to wealth, is not a part of the equation for the vast majority of American millionaires.
Term life insurance covers the insured person for a certain period of years. If the insured dies during that time, the insurance company pays out the death benefit to the named beneficiary.
So it is important to ensure that you know the status of your policy. And don’t forget to designate the beneficiaries you want to receive the death benefit. If there is a significant change in your life, you may want to change the beneficiary designation.
Based on the plan I teach, the idea is to have proper life insurance coverage until you create enough wealth to be self-insured. At that point, when your household can financially function without your contribution, that’s when life insurance becomes not as necessary.
Closing Thoughts
As I mentioned at the beginning, each person’s needs for these insurance coverages will be different. But everyone, by and large, needs to have these protections as a part of a holistic financial plan.
You don’t want to have too much insurance and be insurance-poor. But when life happens, these products will protect your family and ensure that you can continue to build wealth.
Helping you on your journey to financial freedom is what I specialize in. To learn more about what you need to do to find that freedom, schedule your free Discovery Session today!
