Insurance is an interesting industry. It is there to protect you, but it sometimes seems like a huge waste of resources if you don’t need it.
Of course, if you do end up with a serious problem, not having insurance could take an already difficult situation and turn it into a financial catastrophe.
While you don’t need to insure against everything, there are a few insurance policies that you should have.
The key is to recognize which insurance policies are the most essential to protect yourself and find a way to incorporate them into your budget. Not doing so is a gamble which can have a devastating financial impact if something happens.
6 Types of Insurance Policies You Need To Buy
These are the types of insurance you need to insure against the largest threats to your budget in the event of an unexpected disaster:
1. Auto Insurance
If you have a car, you need auto insurance – and not only because every state law requires that you carry it.
For many people, their car is their only way to get to work; if it becomes un-drivable due to an accident, and the money isn’t available to buy a new one, it can be hard to earn a living.
Additionally, if you are at fault in an accident, the liability you have could become very expensive.
Your auto insurance policy may pay medical bills and property damage so that you wouldn’t be forced to come up with the money out of pocket, possibly resulting in financial ruin.
The good news is auto insurance is a competitive industry. You can easily compare rates with different car insurance companies to find the best deal in your area.
2. Life Insurance
Life insurance is probably the most important insurance policy you will ever purchase. It protects your loved ones by providing income for them in the event you pass on.
It can also be a good idea to insure your life, even if you aren’t the primary breadwinner. After all, the duties of a stay-at-home spouse are worth quite a bit.
Though you may not pay a stay-at-home spouse a salary, it would be expensive to replace everything they do to run the household.
Consider your needs, and make sure that you have adequate life insurance.
3. Home/Rental Insurance
Your home represents a huge, expensive asset. If it’s damaged, it’ll cost you, big time. And depending on how bad the damage is, you might not be able to live there while repairs are being made.
Depending on your policy, homeowners insurance can help you pay for home repairs, short-term lodging, or even a new home . . . without a huge outlay of capital all at once.
Rental insurance is also a good idea since the landlord’s property insurance usually only covers the structure and land, not the contents of the rental property.
Thankfully, rental insurance is usually very affordable, sometimes as low as $10 a month. At that price, you can’t afford to skip it.
4. Health Insurance
If uninsured, you may be one hospital stay away from bankruptcy.
Health insurance will help you offset some of the rising costs of health care – at least when it comes to large health needs.
Health insurance can help you better afford the care you need if you have a chronic condition.
Even if you are in good health, and rarely use health care services, it can be a good idea to at least have a policy that covers major medical problems, just in case an accident befalls you.
5. Disability Insurance
Statistics show that 1 in 4 people will become disabled at some point before they retire. Even though this statistic includes people who receive short term disability, it is an astounding number.
This makes us ask the question, “Can I afford a short term or long term disability?”
Is your emergency fund large enough to sustain no income for a month? What about two months, or three months, or six months? The average monthly benefit paid by Social Security Disability Insurance (SSDI) is $1,065 per month. Will that be enough to support your family?
Disability insurance can help cover unknown situations, and it can be a good idea, especially if you are the primary breadwinner in your household or work in a high-risk industry.
If you have an injury that qualifies for your policy, your disability insurance will pay you while you cannot work.
Disability insurance policies often vary substantially between providers, so be sure to thoroughly review your policy to understand which situations qualify for benefits, how and when you qualify for payments, how much you will receive, etc.
Typically, there is a waiting period of up to 30 days or longer before disability benefits kick in, so it is always good to have an emergency fund in place so you can have something to live on in the meantime.
6. Travel Insurance
You may want to consider travel insurance, especially in certain situations.
For example, let’s say you plan the trip of your lifetime, and you go all out, virtually without regard to your budget (which is extreme, I know).
You may not want to worry about spending tens of thousands of dollars and have something come up that ruins the deal.
For a small fee, you can hedge your bets here. Of course, if you’re planning a little weekend trip and making your travel by car, you might want to pass up any extra costs.
You can shop for each of these different types individually, but I always recommend you use a broker or a comparison site to knock it all out at once. In some instances, you can save by bundling policies, too, so it’s worth taking a look.
4 Types of Insurance Policies You Don’t Need
In one of my favorite episodes of the television show Family Guy, a slick door-to-door salesman convinces the bumbling Peter to purchase volcano insurance.
When Peter first suggests that they’d never had volcano trouble in Rhode Island, the salesman responds “Don’t you think we’re due for one?” which ensures his sale.
Even though it would take effort to be as naïve as Peter, there are definitely times when it’s difficult to know if the insurance you are considering is worth your money or if it’s just another example of volcano insurance.
Here are four insurance policies you can feel comfortable skipping:
1. Life Insurance for Children
The traditional purpose of life insurance is to financially provide for your family in the case of premature death.
Since your children are not contributing financially to the family and will most likely grow up to be safe and healthy, paying premiums for their life insurance does not make sense.
The money you would spend on premiums would be better spent in an emergency fund, a 529 plan for their education, or in an IRA.
- Exceptions: Sometimes, a life insurance policy makes sense for children. This includes when your child earns an income and contributes to the family or when you can get a very inexpensive rider on your life insurance policy. Otherwise, you may be better off skipping the life insurance policy for your children.
2. Mortgage Life Insurance
On the surface, this seems like a reasonable policy.
This insurance will pay off your mortgage in the event of your death, giving your family one less financial headache during a stressful time. However, a good life insurance policy should provide your heirs with enough money to handle the mortgage and any other bills they will have to pay.
There’s no need to purchase a separate policy for this—just ensure that your life insurance is adequate to cover your family’s needs.
Caveat: mortgage life insurance can be a good idea if you have preexisting conditions and are ineligible for a term life insurance policy; otherwise, term is the way to go).
3. Credit Card Insurance
For those who carry a balance on their credit card, having a policy that will pay your credit card bill if you cannot do so seems like a smart plan.
The benefits of these plans are relatively limited, meaning you’re paying a monthly premium only to have your benefits capped and still be in debt.
It makes much more sense to send the premium amount toward your bill and try to get your credit card paid off. You’ll save money on interest in addition to avoiding having to pay another bill.
4. Cancer and other Disease Insurance
Sadly, many medical insurance policies have holes in their coverage.
Because of that, specific disease insurance policies—specifically cancer insurance—have become popular over the past few years to care for the gaps in regular medical coverage.
The problem with these types of insurance is that they are so specific and do not necessarily cover everything related to the disease. For example, many cancer insurance policies do not cover skin cancers, the most common form of the disease.
A better use of your money would be to upgrade your current health insurance. That way, you’re covered no matter what happens.
When it comes to insurance, always take the time to research what you need and what will be covered before you sign on the dotted line.
And beware of volcano insurance salesmen!
Are there other types of insurance people need (or should at least consider)? Leave a comment with your thoughts!
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Devon says
I keep my life insurance independent of my work place as suggested above. Deductibles on car and home insurance are usually really high so that I don’t get tempted to claim on a small damage. I’m saving for the emergency fund …have about 80% of my target savings there, still the thought of any untoward incident gives me the jitters. I have combined life, home and car insurance all with AARP to keep paperwork simple.
Hank says
I think that an overlooked insurance for property owners in a general liability coverage.
NAT says
If we’re in the military aren’t we already covered for health insurance (TriCare) and disability (if you injured on the job)? Additionally, you have to check that the health, disability, and life insurance policies don’t have a war clause.
Ryan says
Very true, Nat, military members are covered for health and disability, but not all vets or dependents have all forms of coverage (dependents, for example get free health care coverage, but are not covered for disability).
If you are active duty, it is essential to make sure any secondary life insurance and other policies do not include a war clause, which can prevent a payout if the member dies due to war or terrorist actions.
Rich says
>>>If you are single and don’t have anyone relying on your income, then you may not need life insurance. But if you have a family or other financial dependents, then life insurance is essential!<<<
I agree, if anyone is dependent on your income, life insurance is an absolute must! But I wouldn't discount it for single people necessarily. Often, the cost of a life insurance policy for a healthy young man or woman is so inexpensive that it is worth buying just to get insure future insurability.
Ryan says
Good point, Rich. When I was young and single I also had a $10,000 policy through the military, which was enough to settle my estate and cover any miscellaneous funeral expenses that may not have been covered by the military if I were to die. The plan was only $0.80 per month, which was too cheap to pass up (note: the minimum life insurance policy through the SGLI is now $50,000). Thankfully it wasn’t needed.
Abigail L. says
I did not think I needed pet insurance & thought it was a waste of $$. But after paying out of pocket $4500 for my dog’s emergency surgery I know better! I’m now signed up for pet insurance. It gives me the peace of mind I need plus, its already saved me a TON of money! In my book, pet insurance is a must!
Chris says
I disagree with your comment on pet insurance. When you are an animal lover (and we are), you never even scoff about spending thousands of dollars on emergency surgery for your cat or dog.
However, WE did not have pet insurance. Four years later, our would be insurance premiums for our 5 pets wouldn’t have even covered half the cost of the surgery. We now have pet insurance – a small price to pay for peace of mind.
Ryan says
Thanks for your comment, Chris. The reason I included pet insurance is because there are quite a few policies out there that have many limitations and exclusions. As with any form of insurance, I recommend reading the policy thoroughly. Thanks for sharing your experience.