Six Types of Insurance Everyone Needs

Insurance is the one thing nobody wants to pay for. It’s expensive, and frankly, you may not even wind up needing it. Yet without proper coverage, you could be just one catastrophe away from serious financial implications.

Check out this rundown of the most important insurance types everyone should carry, along with key takeaways for each…

Property & casualty (P&C) insurance

P&C insurance includes homeowners, renters, auto, and umbrella policies that protect your belongings and cover damage caused to other people or their possessions.

Whether you rent or own, it's a good idea to protect yourself against liability in case someone gets injured in your home—and to replace any assets lost to a fire, disaster, or burglary. Homeowner’s insurance is typically mandatory if you have a mortgage and also covers property damage due to accidents and natural disasters.

To make sure you have adequate coverage, look for a guaranteed replacement cost provision or extended dwelling coverage to cover the cost of rebuilding. Add extra if you believe your insurer’s appraisal is low or if your home boasts lots of custom features.

What’s more, a loss-of-use clause covers living expenses over and above your normal costs—a critical benefit if you need to rent or stay in a hotel while any repairs are performed. These add-ons might boost your premium, but you’ll be grateful for them should disaster strike. Keep in mind that many policies exclude floods and earthquakes, so depending on conditions in your local area, this sometimes causes an expensive gap in coverage.

If you drive, automobile insurance is another necessity. Most states require you at least carry liability coverage for any injuries or property damage, and while you may be tempted to skimp on coverage to lower your premium, you should in fact buy as much as you can afford (most experts recommend at least $500,000) —because if you hurt someone, you’re not only on the hook for their medical bills but also potential lawsuit costs. Any medical or legal expenses above the maximum covered by your policy are your responsibility to pay.

Collision coverage, meanwhile, pays for damage to your vehicle regardless of who’s at fault. Each insurance company has its own method of determining repair/replacement costs, so be sure to review specific policy terms in advance. If you’re still paying off your vehicle, your lender or lessor will require this; and unless you can easily pay for automobile damage out of pocket, it’s perhaps worth buying collision insurance.

Comprehensive coverage extends to damage caused by events beyond your control such as theft, falling branches, and natural disasters. Other extras to consider are car rental reimbursement and GAP insurance, the latter of which pays off the difference between the value of your car and how much remains on your loan should your vehicle become badly damaged or totaled.

Finally, umbrella coverage is a catch-all policy that protects you above your existing home and auto insurance policies—which is notably important if you have significant assets and want added peace of mind in the off-chance you are sued. If you’re looking for extra cash to afford an umbrella policy, it may make sense to increase your auto and homeowner’s insurance deductibles.

Health insurance

Given astronomical health care costs, even an isolated illness or accident can lead to financial ruin. In fact, unaffordable medical expenses account for as much as two-thirds of bankruptcies in America (per RetireGuide, a health and wealth website).

If your employer doesn’t offer health insurance, you can compare policies in the marketplace or contact insurance companies directly to review your options. Low- and moderate-income Americans are sometimes also eligible for premium tax credits that lower monthly plan costs.

Don’t let the high cost of medical insurance talk you out of coverage, and if you need to go with a high-deductible health insurance plan (HDHP) to afford premiums, consider complementing the policy with a health savings account (HSA): a type of savings account you can use for qualified out-of-pocket healthcare expenses including deductibles and copays. You’re not required to spend your HSA account balance every year—as any leftover money automatically rolls over to the next one—and a flexible spending account is yet another option to help offset healthcare expenses.

Long-term disability insurance

According to a recent Social Security Administration study, 25% of people will experience some type of disability that temporarily keeps them out of work. Thankfully, a long-term disability insurance policy can help replace a portion of income (typically 40-60%, up to a cap) should you become disabled and unable to work.

Disabilities are more prevalent than you may think and are not just limited to those with dangerous jobs. For example, the most common reasons for long-term disability claims—behind musculoskeletal disorders such as fractures and joint disorders—are cancer, pregnancy-related complications, and mental health issues such as depression and anxiety. Such policies sometimes even cover cardiovascular and circulatory disorders (heart attacks and coronary artery disease).

Regardless of the insurer you choose, it’s essential to understand what constitutes a legitimate claim, your benefit amount and elimination period (how long you’ll need to wait before receiving benefits), and the term (how long you’re covered).

Life insurance

Life insurance is critically important if you have dependents—if you pass away, the policy can pay off debt, temporarily replace your income, and cover funeral costs.

While various life insurance products are available, all are categorized into two types. The first is a term policy, which is the most straightforward overall and covers a set term. Simply stated, if the insured person passes away during that term, a death benefit is paid.

The second type is a permanent policy, which is more complicated and an umbrella term for plans that don’t expire (unlike term policies). These often combine a death benefit with a savings component, allowing you to build cash value you can eventually borrow against. Examples of permanent life insurance include whole and universal policies.

You may already have life insurance through your employer and believe that’s sufficient. However, this type of coverage typically ends if and when you leave your company. Those who find themselves in this position can sometimes transfer the insurance policy to a new company or shift to an individual policy and personally pay premiums. This is sometimes a valuable option, especially if you don’t otherwise qualify for life insurance.

Ultimately, life insurance is designed to prevent loved ones from landing in a tough spot should you pass away unexpectedly. For most people, term life insurance protects families through their prime earning years—which likely include debt, children to support, and other financial obligations. Consult with a financial advisor to help determine the coverage amount and policy type that best fit your own unique circumstances in this regard.

Long-term care insurance

The U.S. Department of Health and Human Services claims there is an almost-70% chance that someone celebrating a 65th birthday today will need some form of long-term care (LTC) services in his or her remaining years. Consequently, you’ll need to plan for long-term care.

If you’re still years away from retirement, long-term care is likely the last thing on your mind. However, experts recommend you obtain a policy no later than your fifties to lock in a lower premium.

Long-term care policies typically cover out-of-pocket expenses accompanying home care, assisted living, and nursing homes: benefits not covered by Medicare or other public programs.

Ultimately, these policies boast a few key benefits. They help protect your savings—recent studies show median annual nursing home costs rise over $94,000 according to Genworth, a long-term care resource—and also provide you with additional care choices. For example, even if you qualify for Medicaid, you’re still restricted to facilities that accept payments from the program.

If you don’t want to purchase a stand-alone policy, know that alternatives include self-funding long-term care and adding a rider to your existing life insurance policy. One large advantage of an LTC rider over a standalone LTC policy is that if you don’t use the care benefit, the policy still pays the death benefit—whereas standalone policies can feel like wasted money if you never file a claim.

Finally, due to the SECURE 2.0 Act, employees will have the ability to withdraw up to $2,500 from their company’s retirement plan to pay for long-term care insurance beginning in 2025. The permitted amount is either up to 10% of the vested plan balance or $2,500 (whichever is lower). This is admittedly not a lot of money, but every little bit helps in this regard.

Identity theft insurance

According to recent studies, a new identity theft victim pops up every two seconds and the odds of becoming a victim are one in fifteen. Fortunately, many insurance options are available in this respect: some of which cost very little or nothing at all.

Considering that credit card fraud—specifically new account openings—is consistently one of the most common forms of identity theft, credit freezes are a great way to prevent criminals from accessing and misusing your financial data. Also known as a security freeze, a credit freeze—once established—makes your credit reports inaccessible to everyone but you, current creditors, and debt collectors. It’s currently free to place and lift freezes with all three bureaus.

Almost all major credit cards offer a free zero-fraud liability policy that protects you from fraudulent charges. Even if your card doesn’t, by law, the most you’re on the hook for is $50. Credit cards are therefore preferred over their debit counterparts, especially for travel and online shopping purchases. Steer clear of credit card protection insurance offers, which are unnecessary.

You should also pull your credit report—which is free to do once a year via annualcredireport.com—from all three major bureaus. This can help you spot any errors and quickly catch signs of potential identity theft.

If identity theft protection is not wrapped into your homeowner’s insurance, you can typically add it on as an inexpensive rider. Not all identity theft policies are created equal, however. At the very least, the policy should cover legal and late fees and offer specialists who can help rectify your situation (recovery).

Lastly, identity theft companies typically offer services that include credit monitoring, alerts, and recovery for a few hundred dollars a year. Consider paying for these services only if you don’t want to freeze your credit reports, are at high risk as a previous victim, or simply don’t want to actively monitor your credit.

Before enrolling in such a service, check with your local bank or credit union (or even membership clubs such as Sam’s Club) as it’s not uncommon for these parties to offer similar services at discounted rates for customers and members.

The bottom line on essential insurance

As you build your wealth, insurance plays an even more critical role in your financial plan as you'll need to protect your assets against any unforeseen events. Due to the complex nature of many insurance products, we recommend speaking to a professional who can provide you with the clarity and guidance necessary to make confident decisions.

Just like the airbags in your car, never underestimate the importance of proper insurance coverage; you hope to never need it, but you’ll be glad to have it if you do.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  The information in this article does not purport to be a complete description of the products referred to in this material.  Not all the products listed above are provided by Vision Retirement or LPL Financial.