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Which types of insurance do you really need, and which ones can wait? Whether you’re protecting your income, your health, or your growing family’s future, this Money Guy Ultimate Guide to Insurance expands on the crucial first step of our Financial Order of Operations (FOO).
Insurance is Step 1 of the FOO!
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In This Article
Insurance and the Financial Order of Operations (FOO)
There are many different types of insurance and not all are created equal. Some are required, like car insurance, while others are optional. And, some may even be harmful to your financial life. Insurance is a double-edged sword. It can be a valuable tool to reduce risk in your financial life, but when used improperly, it can hinder or halt your financial growth.
Making sure you are properly insured isn’t a single step in the Financial Order of Operations, but a pre-requirement for beginning your journey. Step One of the FOO is covering your insurance deductibles, which implies you already have the proper insurance policies in place and have enough saved to cover your deductibles if you needed to utilize your policy.
So, How does Insurance Work?
Insurance in the United States is a regulated industry, and states are the primary regulators of that industry. This means depending on which state you live in, the insurance industry may look a little different.
No types of insurance are mandated by the government, but you may be required to carry insurance to operate a motor vehicle. If you purchase a home with a mortgage, your lender will almost always require you to carry homeowners insurance. Although there is no longer a federal penalty for not having health insurance, some states collect tax penalties from those that go without health insurance.
Beyond different types of insurance that may be a requirement to hold, if you have a mortgage and drive a car, it may be a smart idea to carry other types of coverage.
Are Insurance Companies a Scam?
Although insurance is a very regulated industry, sometimes paying for insurance can feel a little bit like a scam. You can pay into insurance for years or even decades without seeing any financial benefit. If you do need to use your insurance benefits, the insurance company may then raise your rates. For insurance to work, the policyholders must pay, in aggregate, more than they collect in payouts. This means most people will naturally feel like insurance isn’t a good value, or that they aren’t getting their money’s worth.
Those that do get their money’s worth aren’t likely to be very happy about it. If you collect from insurance, it likely means something catastrophic has happened in your life. It could be a major car accident, a fire that destroyed your home, or an unexpected medical diagnosis. Insurance is not an investment or something that you should expect to get a lot of money from one day. It is a safety net that is there to protect you against uncontrollable and unpredictable events.
“We believe that insurance plays an important role in managing risk and protecting you and your family from unforeseen events. However, we also believe that some salespeople take advantage of the unsuspecting public through difficult to comprehend policies that aren’t always in the best interest of the consumer. One of the more popular concepts is called “infinite banking” or “bank on yourself.” Is infinite banking a good investment?”
Are There Insurance Alternatives?
Perhaps due to the rising costs of insurance, alternatives to traditional insurance have risen in popularity over the last several years. There’s no getting around carrying car insurance if you drive or homeowners insurance since your mortgage lender requires it, but healthcare sharing plans or discount plans have become popular alternatives to health insurance.
While the cheaper cost of health share plans may be attractive, there are some big drawbacks when compared to real health insurance. Health share plans are not subject to insurance industry regulation. They do not need to cover pre-existing conditions or cap out-of-pocket costs. They are not even legally required to pay out claims. Your experience may be good with a health share plan, but the risk is substantial and could be catastrophic to your financial life.
Self-insuring is a viable alternative to certain types of insurance if your financial situation can handle it. What does that mean? Well, at a certain point, you may have enough in assets to cover certain risks, like an untimely death.
What Types of Insurance Do You Need?
There are certain types of insurance you shouldn’t go without and others that you may not need. Home insurance and car insurance are likely required by your state or lender and are no-brainers to carry. Health insurance is not required, but since nobody can predict medical expenses with 100% certainty, health insurance is a must to protect your finances.
Life insurance is not always necessary. The general rule for life insurance is if someone else is dependent on your income, it may be a good idea to have coverage if you are not able to self-insure. If you are single and don’t have any dependents? You may not need life insurance. Disability insurance could be a good idea if a disability would make it difficult for you to earn a living or impossible to continue doing what you do. Disabilities are extremely common, with one in four adults in the US living with disabilities, and if a disability could affect your financial life, it may be a good idea to carry disability insurance.
Some other types of insurance may or may not be a good idea depending on your risk tolerance and ability to self-insure. One example is pet insurance. Some find it extremely valuable and well worth it, while others would rather take their chances and self-insure against any potential illness or vet bills.
How Much Coverage Do You Need?
The amount of insurance coverage you need depends on your risk. If you are not in great health or have a family history of medical conditions, it may make sense to carry more health insurance. If you have a large amount of financial assets to protect, more umbrella insurance could make sense. A fee-only financial advisor can help determine how much insurance coverage your particular financial situation warrants.
Types of Insurance You Probably Need
Homeowners Insurance
Homeowners insurance can protect your home and belongings against loss, damage, and other events. It may be required by your lender if you have a mortgage on your home.
Money Guy’s Take:
Homeowners insurance can protect your home and belongings and the cost to self-insure is very steep. For almost everyone, it is a good idea to have homeowners insurance.
Related videos, articles, and FAQs
- Buying a House – Money Guy’s Ultimate Guide To Your Biggest Purchase
- What Types of Insurance Do You Need?
- Homeowners Insurance 101
Life Insurance
There are many different types of life insurance and they all work a little differently. At its core, life insurance is meant to protect you or a loved one against an unexpected death.
Money Guy’s Take:
We love the protection that term life insurance offers, but we don’t believe life insurance makes a great financial investment. You may only need term life insurance if someone else depends on your income to live.
Related videos, articles, and FAQs
- Do I Need Life Insurance? What’s the Difference Between Whole Life and Term?
- Is It a Good Idea to Use Permanent Life Insurance for Long-Term Care Expenses?
- At What Net Worth Should You Cancel Your Life Insurance?
- Life Insurance 101: What You Need (and What You Don’t)
Health Insurance
Healthcare costs in the United States are unpredictable and potentially very expensive. Even a simple medical issue could lead to a five-figure medical bill if you don’t have insurance.
Money Guy’s Take:
You should probably carry health insurance even if you are in good health.
Related videos, articles, and FAQs
- What is an HSA and Should I Contribute to One?
- HSAs, FSAs, and More, Oh My!
- HRA, HSA, and a Little History of Insurance
Disability Insurance
If a disability would impact your ability to make a living, it is a good idea to carry disability insurance. Many people are covered through their employer but additional disability insurance may be necessary depending on your profession or level of income.
Money Guy’s Take:
You have a higher chance of becoming disabled than dying at any given time, so it’s probably a good idea to have disability insurance. Your workplace policy may not be enough coverage for you.
Related videos, articles, and FAQs
Auto Insurance
Car insurance is likely required if you drive, but there are still different levels of coverage to consider. Although it may not be required, it is usually a good idea to carry uninsured motorist coverage.
Money Guy’s Take:
You probably don’t need full coverage if your car is older, but we always recommend carrying uninsured motorist coverage if you can afford it.
Related videos, articles, and FAQs
- Comprehensive vs. Liability Car Insurance: Which Should You Buy?
- Year End Taxes & Investments, Auto Insurance Savings, & Variable Annuities
- 9 Ways to Lower Your Auto Insurance Bill
Pet Insurance
Pet insurance is not required, but if your pet could require expensive surgery or vet bills, pet insurance may be a good idea.
Money Guy’s Take:
Pet insurance may or may not be worth it, depending on the age and health of your pet and your risk tolerance. Many pet owners swear by pet insurance and find it very valuable.
Umbrella Insurance
Umbrella insurance provides additional liability coverage above the limits of your homeowners or auto insurance policies. It is often affordable and can be a good idea if you have substantial assets to protect.
Money Guy’s Take:
If you have substantial assets, we recommend umbrella insurance.
Related videos, articles, and FAQs
Self Insurance
Self-insurance refers to the practice of setting aside money to cover potential risks instead of purchasing an insurance policy. This is usually only a viable option for those with significant assets.
Money Guy’s Take:
We generally recommend insurance over self-insurance for most risks. However, if you have substantial assets and can handle the risk, self-insuring can be a way to save money on premiums.
Travel Insurance
Travel insurance can cover unexpected costs that arise when traveling, such as trip cancellations, lost luggage, or medical emergencies.
Money Guy’s Take:
Travel insurance can be a good idea if your trip is expensive or involves potential risks, like international travel. However, if your trip is relatively low-cost or you can absorb the risk, it may not be necessary.
Related videos, articles, and FAQs
Renter’s Insurance
Renter’s insurance provides coverage for personal property and liability for renters.
Money Guy’s Take:
Renter’s insurance is usually affordable and provides valuable protection, so we generally recommend it for renters.
Related videos, articles, and FAQs
Long-Term Care Insurance
Long-term care insurance covers costs associated with long-term care, such as in a nursing home or with in-home care services.
Money Guy’s Take:
We recommend looking into long-term care insurance if you are in your 50s or 60s, as the costs of long-term care can be very high and Medicaid may not cover everything you need.
Related videos, articles, and FAQs
Identity Theft Insurance
Identity theft insurance covers the cost of restoring your identity if it’s stolen, including legal fees and lost wages.
Money Guy’s Take:
Identity theft insurance can be a good idea if you are at risk, but you may be able to get similar protection through other services or strategies, such as credit monitoring and freezing your credit.
Related videos, articles, and FAQs
Homeowners Insurance
Homeowners insurance covers damage to your home and personal property, as well as liability for injuries that occur on your property.
Money Guy’s Take:
Homeowners insurance is essential if you own a home. We recommend reviewing your policy regularly to make sure you have adequate coverage for your home’s value and any potential liabilities.
Related videos, articles, and FAQs
Flood Insurance
Flood insurance covers damage caused by flooding, which is not typically covered by standard homeowners insurance policies.
Money Guy’s Take:
If you live in a flood-prone area, flood insurance is essential. Even if you don’t live in a high-risk area, it may be worth considering.
Referenced in This Article
- How Much Disability Insurance Do I Need?
https://www.policygenius.com/disability-insurance/how-much-disability-insurance-do-i-need/ - Why Health Insurance is Important
https://www.healthcare.gov/why-coverage-is-important/ - Guide to Long-Term Care Insurance
https://www.aarp.org/retirement/planning-for-retirement/info-2020/long-term-care-insurance-guide.html - Understanding Homeowners Insurance
https://www.iii.org/article/what-is-covered-by-standard-homeowners-insurance/ - What Car Insurance Coverage Do You Need?
https://www.nerdwallet.com/article/insurance/what-car-insurance-coverage-do-you-need/ - Term Life Insurance Basics
https://www.nerdwallet.com/article/insurance/term-life-insurance/ - How Does Life Insurance Work?
https://www.policygenius.com/life-insurance/how-does-life-insurance-work/ - Understanding Estate Planning
https://www.aarp.org/retirement/planning-for-retirement/info-2020/estate-planning-guide.html - What is a Living Will?
https://www.legalzoom.com/articles/what-is-a-living-will/ - Do I Need an Umbrella Policy?
https://www.nerdwallet.com/article/insurance/do-i-need-an-umbrella-policy/ - Understanding Homeowners Insurance Deductibles
https://www.iii.org/article/understanding-homeowners-insurance-deductibles/
