How do you know your family is safe when you go to bed every night, no matter the future? Insurance. But what is the right amount of insurance you should have?
Insurance exists to cover nearly anything the world can throw at you throughout your lifespan. It plays a bigger role in day to day activities than many people are even aware of. But knowing exactly how much insurance to have for your specific situation in life isn’t always so clear.
Insurers are more than happy to sell you more insurance than you need. For example, someone who is single with no children will have far different insurance needs than someone who is married with three children. There are a few known principles to keep in mind when it comes to buying insurance coverage. Let’s look at the main six.
Health Insurance
This is one of the most important insurances you can have but for many it is difficult to acquire due to the high costs of private health insurance. Luckily, the Affordable Care Act provides millions with health insurance who are unable to receive it from their employer or who cannot afford private insurance due to high costs.
Health care covers you in a few different ways all related to medical health. Things like regular checkups, emergency care, pediatric medicine, prescriptions, and specializations. The costs of paying out of pocket for health care are incredibly high in the United States so having health insurance is incredibly important.
Think of a bad ankle break. You go to the emergency room in an ambulance, they must operate, you stay at the hospital and are discharged. That could cost well over $30,000. If you don’t have insurance, you are expected to pay out of pocket. The sad state of healthcare in the United States is that people are being bankrupted by these sorts of medical emergencies or are simply not seeking treatment. So, having health insurance is critical to physical and financial wellbeing.
One of the most important factors to any health insurance plan is the deductible attached to the policy. You are required to pay out of pocket the deductible along with coinsurance costs. If the plan has a $4000 deductible, but also requires you pay 15% of expenses over that amount (up to $10,000) – that is an additional $1,500 you’ll owe. Meaning your costs in any one year out-of-pocket would be $5,500 ($4,000 + $1500).
Assuming you can pay the monthly health insurance premiums and have enough money saved to pay up to $5,500 (for the example policy above), you’ll be ok. But health insurance is rather complex and when it comes to increased costs for pre-existing conditions or denial of coverage, plus the costs, it can get very messy.
Verdict: Get Health Insurance
Due to the ridiculously high costs of healthcare in the United States, health insurance should be at the top of your insurance priorities. Some is better than none after all.
Auto Insurance
How much care insurance you need is far simpler to determine than health insurance. This is for a few different reasons, one of which is that each state requires a set amount of car insurance for the car to be street legal. Meaning you can’t legally drive without car insurance. So that takes away the question of whether you need it or not as if you want to drive you need auto insurance, period.
But based on how much you drive, the type of car you have, where you live, and your driving history; car insurance can very greatly in terms of monthly costs and deductibles. Car insurance usually is determined in a 50 – 100 – 25 set. $50,000 to cover each individual injured (bodily harm), with a max of 100K per accident for two individuals, and $25,000 to cover any property damage. This is a general minimum for car insurance. You can increase these easily through your car insurer if you feel you need more coverage.
Car insurances protect you in an accident but is also designed to protect your assets (home, investments, etc.). If you own a home and have some investments, you should make sure you’re auto insurance covers the amount of your assets. This way if you are sued following an accident, they plaintiff will likely take the insurance payout because it meets or exceeds that of your personal assets.
If you have an older vehicle that isn’t worth much anymore you will also want to skip the comprehensive collision insurance. As it’s not worth paying a higher premium to fix a car that is old and not worth a lot.
Verdict: Auto insurance is a must. Do your best to have your car insurance cover the amount of your total assets. If you don’t have assets that can be the bare bones plan, but if you have assets be sure you’re covering them to the best of your ability through auto insurance.
Life Insurance
Life insurance is another type of insurance that different people will need differently. A life insurance agent will be happy to sell you the largest possible policy, but do you really need that much coverage? There are a few ways to look at life insurance. One is to cover your income and earnings for a set time period.
If you’re the sole bread winner for your family, you may consider a policy that will cover your income for 20 years or more. Or you could look to cover the length of time until your children are out of college. Or you could look for a policy that will cover all of you and your spouse’s current debt. This could include student loans, car loans, credit card debt, mortgage, and could greatly reduce monthly costs to your family getting close to your income level now.
Young people can get term life insurance (which covers you the length of your life) for ridiculously cheap. As you age the cost of coverage will increase. Life insurance should be viewed as a protective asset for your loved one’s should you face an untimely death.
Verdict: Life is unpredictable.
It’s a good idea to have some protection for your family or if you plan on having a family at any point down the road. Costs are low and if the policy needs to be used it can be a lifeline for an already grieving family.
Homeowners Insurance
(You’ll only need this if you own a home, so if you’re renting read on to renters insurance below.)
First, you’ll need to insure the actual physical building. The most complete way to do this is to have what is called a “guaranteed replacement cost” policy. This will cover the entire cost of rebuilding your home from the ground up should disaster strike. You’ll need an accurate home building estimate to determine your recommended coverage level (a different number than a real estate agent’s property appraisal).
Beyond the physical structure is everything you have inside the home. No, homeowners insurance can’t replace any family photos damaged in a fire, but it will cover most everything else. You’ll need to do a complete inventory of what is in your home (furniture, technology, appliances, etc.). Usually the homeowner’s insurance provider will put a 50% replacement to the contents of the home.
If your guaranteed replacement cost is $250,00, $125,000 would be added to cover the contents within the structure.
You’ll also want “homeowner’s liability insurance”. If someone is visiting and falls and breaks their neck, they can sue you for damages and medical expenses (yes this happens more than you might think even if they are family). So, in the case of a lawsuit your homeowner’s liability insurance will cover the costs to a set amount, usually within $300K and $500K. A figure likely to cover anything that could result from personal injury on your property (even if it is not your fault at all).
Don’t forget inflation. There should be some room in your policy that covers inflation over time. Homeowners insurance on the first year of a 30-year mortgage will have far different replacement costs 2 decades from day one. So, the policy should have that in mind.
Home Owners Verdict: a must-own if you own a home.
Renters Insurance
Renters Insurance covers renters from damage or theft of their property. It is incredibly cheap, is required by many buildings and landlords, and doesn’t only protect your things within your apartment.
Far less complicated than homeowner’s insurance, renter’s insurance covers only the contents within your apartment or rented home. The structure is not something you need to insure as you don’t own the actual building, you’re just renting the building or room within.
$5,000 coverage for a single room is usually ok but remember you’ll need a full itemized inventory with photos and dates should you ever need to file a claim. If you have a lot of expensive jewelry or technology, you may want more coverage. Because renters insurance is very inexpensive it’s also easy to pay too much without realizing it.
The last time I had renter’s insurance it covered up to $10,000 of items and cost about $120 for the entire year. That about $10 a month.
Renters Insurance Verdict: it’s a smart choice.
See our more in-depth write up on Renters Insurance and how it can protect items outside of your apartment as well.
Pet Insurance
This will only matter if you have a pet or pets (usually dogs and cats). Health care for your pets is way less than for human beings but that doesn’t mean inexpensive. A complicated surgery for your sick dog could cost thousands of dollars, which if paid out of pocket could be a large financial burden for most.
How much pet insurance you need is also a completely subjective metric. Some people are way more attached to their pets and are willing to pay huge amounts to keep them healthy. If you have pet insurance and your pet gets sick or injured, the pet insurance can open many treatment avenues that you otherwise would not be able to consider due to the cost.
Pet Insurance Verdict: if you can afford it and love your pets, it’s a good idea.
People often think “how much can a trip to the vet really cost?”. The answer can be a lot more than you think and paying thousands out of pocket for your pet may be a financial strain even if it is a no brainer. Having pet insurance doesn’t cost a whole lot and can give you peace of mind knowing your little loved one of the non-human variety is protected no matter what.
How Much Insurance Is Too Much?
We’ve seen from the six main types of insurance how you should be protecting yourself based on your individual need. Be sure to compare different companies’ policy costs and coverages. Ask questions if you have them and eliminate wasted costs by over insuring, but don’t underinsure yourself either. It is a balance you can easily find to be sure you’re covered but also not paying too much.
