We can't prevent the unexpected from happening, but sometimes we can protect ourselves and our families from the worst of the financial fallout.
Selecting the right type and amount of insurance is based on your specific situation, such as children, age, lifestyle, and employment benefits.
Four types of insurance that most financial experts recommend include life, health, auto, and long-term disability.
Key Takeaways
- Life insurance will help provide financially for your survivors.
- Health insurance protects you from catastrophic bills in case of a serious accident or illness.
- Long-term disability protects you from an unexpected loss of income.
- Auto insurance prevents you from bearing the financial burden of an expensive accident.
1. Life Insurance
The two basic types of life insurance are traditional whole life and term life.
- Whole life can be used as an income tool as well as an insurance instrument. It includes a death benefit and also a cash value component. As the value grows, you can access the money by taking a loan or withdrawing funds and you can end the policy by taking the cash value of the policy.
- Term life covers you for a set amount of time like 10, 20, or 30 years and your premiums remain stable. Commonly the most affordable type of life insurance, a term policy can work to cover the years during which a mortgage loan is outstanding or throughout your children's college years.
Life insurance is especially important if your family is dependent on your salary. Industry experts suggest a policy that pays out 10 times your yearly income.
When estimating the amount of life insurance you need, factor in funeral expenses. Then calculate your family's daily living expenses. These may include mortgage payments, outstanding loans, credit card debt, taxes, child care, and future college costs.
According to a 2023 report by the U.S. Bureau of Labor Statistics, both spouses worked and brought in income in 48.9% of married-couple families in 2022. This is up from 46.8% in 2021. They would be likely to experience financial hardship as a result of one of their wage earners' deaths.
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2. Health Insurance
Health insurance can be obtained through your employer, thefederal health insurance marketplace, or private insurance you buy for yourself and your family by contacting health insurance companies directly or going through a health insurance agent.
Only about 9.2% of the American population was without insurance coverage in 2021, the Centers for Disease Control (CDC) reported in its National Center for Health Statistics. More than 60% got their coverage through an employer or in the private insurance marketplace while the rest were covered by government-subsidized programs including Medicare and Medicaid, veterans' benefits programs, and the federal marketplace established under the Affordable Care Act.
If you're on a very tight budget, even a minimal policy is better than none. If your income is low, you may be one of the 80 million Americans who are eligible for Medicaid.
If your income is moderate but doesn't stretch to insurance coverage, you may be eligible for subsidized coverage under the federal Affordable Care Act.
The best and least expensive option for salaried employees is usually participating in your employer's insurance program if your employer has one. The average annual premium cost to the employee in an employer-sponsored healthcare program was $22,463 for a family plan in 2022, according to research published by the Kaiser Family Foundation.
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3. Long-Term Disability Coverage
Long-term disability insurance supports those who become unable to work. According to the Social Security Administration, one in four workers entering the workforce will become disabled before they reach the age of retirement.
While health insurance pays for hospitalization and medical bills, you are often burdened with all of the expenses that your paycheck had covered. Many employers offer both short- and long-term disability insurance as part of their benefits package. This would be the best option for securing affordable disability coverage.
If your employer doesn't offer long-term coverage, here are some things to consider before purchasing insurance on your own:
- A policy that guarantees income replacement is optimal. Many policies pay 40% to 70% of your income.
- The cost of disability insurance is based on many factors, including age, lifestyle, and health. The average cost is 1% to 3% of your annual salary.
- Before you buy, read the fine print. Many plans require a three-month waiting period before the coverage kicks in, provide a maximum of three years' worth of coverage, and have significant policy exclusions.
4. Auto Insurance
Despite years of improvements in auto safety, an estimated 31,785 people died in traffic accidents on U.S. roads and highways in the first nine months of 2022, according to the National Highway Traffic Safety Administration.
Almost all states require drivers to have auto insurance and the few that don't still hold drivers financially responsible for any damage or injuries they cause. Here are your options when purchasing car insurance:
- Liability coverage: Pays for property damage and injuries you cause to others if you’re at fault for an accident and also covers litigation costs and judgments or settlements if you’re sued because of a car accident.
- Comprehensive and collision coverage: Collision insurance pays to repair or replace your car after an accident, regardless of fault. Comprehensive insurance covers theft and damage to your car due to floods, hail, fire, vandalism, falling objects, and animal strikes. When you finance your car or lease a car, this type of insurance is mandatory.
- Uninsured/underinsured motorist (UM) coverage: If an uninsured or underinsured driver strikes your vehicle, this coverage pays for you and your passenger's medical expenses and may also account for lost income or compensate for pain and suffering.
- Personal injury protection (PIP): PIP insurance helps reimburse you and your passengers for costs such as rehabilitation and lost wages.
- Medical payment coverage: MedPay coverage helps pay for medical expenses, typically between $1,000 and $5,000 for you and your passengers if you’re injured in an accident.
As with all insurance, your circ*mstances will determine the cost. Compare several rate quotes and the coverage provided, and check periodically to see if you qualify for a lower rate based on your age, driving record, or the area where you live.
The Bottom Line
Most experts agree that life, health, long-term disability, and auto insurance are the four types of insurance you must have. Employer coverage is often the best option, but if that is unavailable, obtain quotes from several providers as many provide discounts if you purchase more than one type of coverage.
