Find out the 5 types of insurance you really need and how much is enough.
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 permanent:
- Term life 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.
- Permanent life 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 basic rule of thumb is to purchase a policy that’s at least 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.
Type #4: Auto Insurance
Auto insurance is required by most states. It's a collection of policies that protect you against financial loss in 3 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 should have enough auto insurance to cover the total value of your all assets—such as your home, vehicles, savings accounts, and non-retirement investments—if you were involved in a lawsuit.
Rates vary depending on factors like your driving record, vehicle, and credit (in most states). Choosing a higher deductible will lower your monthly premium. You can shop auto insurance at sites like carinsuracequotes.com and insureme.com.
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 pays for claims when a natural disaster, such as a fire, tornado, or hail storm, damages your property. Your possessions, like furnishings, clothes, and jewelry, are generally covered up to certain limits.
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 a natural disaster or theft, for instance. You can compare rates for home or renters policies at sites like insurancequotes.com or insweb.com.
See also: Your Guide to Renters Insurance
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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