by Laura Adams

This article is the fourth in our five-part series about taking charge of your finances in 2010. Today’s post is about insurance—which types to have and how much coverage is necessary to keep you protected.

This episode is brought to you by Carbonite Online Backup. It allows you to securely and automatically back up your PC or Mac whenever you connect to the Internet. Get a free trial plus two free months if you decide to subscribe when you sign up at Carbonite.com and use the offer code “money”.

Why You Need Insurance

Without adequate insurance, everything that we’ve talked about in the prior three posts—setting goals, saving, and investing—could all be destroyed. I really hate to sound like a doomsayer, but a catastrophic event like a health problem, a car accident, or a death in your family could wipe out everything you’ve worked so hard to earn. It’s not pleasant to think about what bad things could happen, and maybe that’s why so many people are underinsured. But managing different types of risk is easy, in a financial sense, because most of them can be passed on to a third party, like a health or life insurance company. Having enough of the right kinds of insurance allows you to protect yourself and those you love from something unexpected jeopardizing your financial security and happiness.

Having enough of the right kinds of insurance allows you to protect yourself and those you love from something unexpected jeopardizing your financial security and happiness.

What Kinds of Insurance Do You Need?

There are endless types of insurance, from policies that protect airplanes to those that cover websites. But I’m going to focus on the five types that are most important for individuals and families:

Type #1: Health Insurance

Health insurance is the most important insurance to have. Without it you risk being stuck with a large bill if you have any kind of medical issue from the flu to a broken bone. Even a quick emergency room visit or a basic hospital bill can cost thousands of dollars. If you don’t have the option to purchase health insurance at work, or if you’re self-employed, shop rates at ehealthinsurance.com. Also don’t assume that your workplace option is the best one for you. Review it in light of your family’s situation. In some cases it could be better to take a group policy for yourself but to insure your dependents separately, for example. You may be surprised to find that a high-deductible health plan can be affordable. Compare policies by reviewing all the features and terms carefully.

Type #2: Disability Insurance

Disability insurance provides a percentage of replacement income if you’re unable to work due to a disability, illness, or accident. Remember that health insurance only addresses your medical bills; it doesn’t pay your living expenses, like housing or food, if you can’t earn money for an extended period of time. According to information on insure.com, you have a one in five chance of becoming disabled during your working years. You’re more likely to suffer a disability than you are to die before the age of 65! And when a long-term disability occurs, the average absence from work is 2½ years. That could cause a major financial strain for you or family members who depend on your income. Social Security is only available after you’ve been out of work for a year and are completely disabled. Worker’s compensation insurance is only for work-related injuries. If you don’t have the option to purchase a disability policy at work, (or if you do but it’s not sufficient), purchase a private policy for yourself and have enough emergency money set aside to tide you over until coverage begins. Shop around at sites like disabilityquotes.com and metlife.com to get as much coverage as you can afford. There’s a disability calculator on the MetLife site that may be helpful.

Type #3: Life Insurance

Life insurance is critical when your death would create a financial hardship for those you leave behind, such as a spouse or children. If you’re single, or no one depends on your income, you either need a very small policy for your funeral expenses or none at all. If you have a stay-at-home spouse who cares for your children, you probably also need a small policy on their life to cover future child care costs. You should never buy life insurance on children, because they’re the ones meant to benefit from insurance proceeds. There are two basic kinds of life insurance—term and cash-value:

  • Term insurance provides a benefit upon the death of the policy owner for a set period of time such as 10 or 20 years. I prefer term insurance because it’s inexpensive and gives you the most benefit for the dollar.

  • Cash-value insurance includes a variety of products such as whole life, universal life, and variable life. I won’t get into the details on each of those, but they provide a death benefit and an investment all wrapped up in one. They’re also called permanent life policies because you get lifetime coverage.

A good rule of thumb is to purchase a policy that’s 10 times your income. So if you make $50,000, you might need a policy that would pay your beneficiary $500,000. But factors like the number of children you have, education expenses, mortgage payments, and the lifetime income needs of a surviving partner or spouse should come into play. If you don’t have life insurance though work, or if you do but it isn’t enough, take a look at the insurance calculators at bankrate.com to see what type of life insurance may be best for you and how much you need.

Type #4: Auto Insurance

Auto insurance is required by most states. Find out the minimum requirement for your state at carinsurance.com. Auto insurance is a collection of policies that protect you against financial loss in three major ways:

  • Property coverage pays for damage to your car. A comprehensive portion pays for damage that wasn’t the result of an accident, like for vandalism, storm damage, or theft. And there’s a collision portion that covers damage that was the result of an accident.

  • Liability coverage pays for your legal obligations to others for damaging their property or harming them in an accident.

  • Medical coverage pays for the cost of treating accident injuries, and sometimes for lost wages and funeral expenses.

Every driver should have liability and medical coverage; however, you may not need comprehensive or collision depending on the age and condition of your vehicle. For an older car, it may not be worth it. You want to have enough auto insurance to cover an amount equal to the total value of your all assets, such as your home, vehicles, savings accounts, and investments. Rates vary depending on the kind of vehicle you have and your driving record. Choosing higher deductibles will lower your monthly premiums. You can shop auto insurance at sites like insweb.com, esurance.com, or carinsurance.com.

Carbonite.com

Before I cover the fifth type of insurance that you should have, I want to thank Carbonite for sponsoring this episode. Carbonite is kind of like insurance for your computer files. I use it and it gives me peace of mind that all my important documents, like the book I’m writing, my financial records, photos, and music, get automatically backed up. Carbonite sends my data to offsite servers, so it’s safe. Carbonite is offering a free 15-day trial, plus two free months if you decide to subscribe. It’s just $55 for a year of unlimited backups. And, by the way, no credit card is required to get the 15-day trial. Go to Carbonite.com and remember to enter the offer code “money”. That’s Carbonite.com, offer code “money”.

Type #5: Homeowners Insurance

Homeowners insurance is important to protect the replacement value of your home and its contents. It’s a requirement when you have a mortgage. Basic home insurance compensates you when a natural disaster, such as a flood, earthquake, or tornado, damages your property, but it doesn’t insure your belongings. You can add a rider for specific possessions like jewelry, furnishings, and artwork. There’s also a liability portion that covers you if someone gets hurt while they’re on your property. Renters also need renters insurance to cover their belongings in the event of fire, flood, or theft, for instance. You can compare rates for these policies at homeinsurance.com or geico.com.

You work hard to build wealth and have a comfortable life, so remember to protect it by reviewing your insurance needs each year.

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More Resources:

Podcast 131: Who Needs Long-Term Care Insurance