Having the right insurances in place is part of having a healthy financial plan. Many people don’t know where to start. There are so many types of insurance out there, and you can buy insurance on anything. The problem is you don’t need most of the insurances that are being sold. That doesn’t mean there’s not a place for some of those types of insurances, but most people do not need them. Let’s look at some of the common insurances like Health, Life, and Disability that you should have in place.
You need to be careful that you aren’t buying a policy you don’t need because you are wasting your money. For instance, don’t let some sweet-talking insurance agent sell you a mortgage insurance policy when you have adequate life insurance in place. If you do not qualify for life insurance, then you can consider having a mortgage insurance policy. It’s going to cost you a lot more, but in that case, you might need it.
You should have health insurance. As of January 1, 2019, you are no longer required by the federal government to carry health insurance, but that doesn’t mean you shouldn’t have a policy. Keep in mind that some states may require you to have health insurance. Even if you are against Obamacare and having the government subsidize health insurance or if you are for Medicaid-for-All and waiting for the government to give everyone “free” health insurance, you should carry health insurance. Medical debt is the number one reason people go bankrupt. You don’t need insurance to go in for a hangnail. Your emergency fund we’ll take care of that cost. You need insurance when you have a heart attack.
You need to have a policy that covers anything you cannot afford to pay for. If you cannot afford to pay a large deductible, then you need to consider having a lower deductible plan, but that is going to cost you more in premiums. If you are young and healthy, consider looking into a high-deductible health plan and a health savings account (HSA). Compare the costs of a few plans and determine how much coverage you should have based on your health and lifestyle.
You need life insurance if there are people who rely on your income for their wellbeing. One recommendation is to have 10 to 12 times your income in coverage. A non-working spouse should have a policy as well since they provide economic value to the family.
If you are financially independent and have enough money to last you for the rest of your life, you don’t need life insurance anymore. Don’t continue to have a policy just so your adult kids can have an inheritance. That is not what insurance is for. Instead of paying the premiums, invest that money.
Insurance is to transfer risk and not to make you wealthy. Insurance is a tool, and it’s best to use tools for what they were designed for. It’s more efficient this way. You can use a screwdriver to pound in nails or a knife to eat a salad, but there are better tools to do those things more efficiently. It’s the same with insurance.
You want to have a term life policy and need to consider getting rid of your whole life policy if you have one. In all cases, never drop a policy until you have your next policy in place. There are some exceptions where you need to continue your whole life policy. Here are two:
If you have a whole life policy in place and do not qualify for term life insurance, then keep your whole life policy in place.
If you and your spouse are not going to become financially independent in 20 years, then stick with your whole life insurance, because you will end up relying on your income your whole life.
There are other reasons, so discuss this with a qualified insurance agent. Just don’t get them to sell you something that you don’t need. Seek out a second opinion if you think your agent is trying to sell you something that you don’t need.
Disability insurance is for when you no longer can work because of a disability or accident. There are both short-term disability and long-term disability insurance. If you have your fully funded emergency fund in place, then you only need to buy long term disability insurance. If you do not have your emergency fund in place, then you can consider short-term disability insurance. It all depends on if you have a plan for if you become disabled. If you are a dual-income household, then neither of you really need short-term disability. You at least need to have a plan on how your monthly bills will be paid if you are out of work for a short period of time. The best plan is to get out of debt and have an emergency fund in place.
For long-term disability, your deductible for disability insurance is your elimination period. The elimination period is the amount of time that you will have to wait until your insurance starts paying you. The longer the elimination period, the lower your premiums can be. Most policies will pay 60% to 70% of your income. This is what you want.
It is recommended that you have long term disability insurance until you have enough assets to be able to live out the rest of your life if you become permanently disabled.
Nobody likes to spend their money on insurance, but you have to have some of these in place until you can self-insure in order to protect yourself. I am encouraging you to have health insurance, and you should carry this the rest of your life. As for life and disability insurance, the wealthier you become the less likely you need those.