NEW! Listen to this article. (Read by George Kamel)
Like it or not, everyone needs insurance. And when we say “everyone,” we mean everyone. Whether you’re just starting out after getting your college degree or married with kids, a dog and a house with a white picket fence, having the right insurance will help you sleep a little better at night.
After all, the primary purpose of insurance is to transfer the risk of financial loss from you to the insurance company. Insurance policies cover large, unexpected expenses that could otherwise destroy your financial life. That’s why they call it coverage. You can take our 5-Minute Coverage Checkup to make sure you have all the coverage you need.
And listen, nobody loves spending money on insurance. After all, it’s pretty much the only thing we pay for and hope we never have to use. But believe us when we tell you you’ll be glad you made room in your budget for it.
Basic Terms and Definitions
Before you explore the basic insurance policies everyone should know, make sure you understand these terms first:
This is the amount of money you pay an insurance company for an insurance policy. Depending on your policy, you might pay your premium monthly, quarterly or annually. A lot of factors determine how much your premium is, but you can generally keep your costs down by getting a higher-than-normal deductible. You can afford a higher deductible if you have an emergency fund.
Your deductible is the amount of money you have to pay out of pocket before your insurance company pays their portion. For example, suppose you selected a car insurance policy with a $1,000 deductible. If you get into a car accident that causes $2,000 worth of damage to your car, you will just have to pay $1,000 toward the repair before your insurance kicks in.
Connect with an insurance pro in your area today and save more.
Again, depending on the type of policy, once you reach the deductible, your insurance company will cover all qualified incidents until the policy term ends, usually a year. But sometimes policies require you to meet a deductible for each incident, so it’s important to understand exactly how your policy works.
Regarding health insurance, a copay is the amount you pay every time you need a specific type of service—such as an office visit. Usually, your copayments do not contribute to your deductible.
This is part of your insurance that covers other people’s costs if you are at fault for an incident that caused them injury or damage to their property. Let’s say you’re renting an apartment and you accidentally start a kitchen fire that destroys your neighbor’s property. It would be up to you to replace their stuff (not your landlord). So it would be a relief to know you have a renter’s insurance policy with $500,000 in liability to cover the cost.
This is your formal proof of insurance. Also called a certificate of insurance, your declarations page is a document that contains information such as effective dates of the policy, premium and deductible amounts, liability limits, the amount of coverage, etc.
A claim is just your request for payment or reimbursement from your insurance company. If you’re involved in a car accident, for example, you’d contact your auto insurance company as soon as possible (their phone number should be listed on the front of your insurance card).
To "file a claim," you’ll have to provide information about yourself, the incident and personal contacts of everyone involved. Your insurance company will process the information and follow up with you about the next steps to receive reimbursement for any damages.
Knowing those terms will help you better understand these basic insurance policies:
We Americans love our cars! But it’s more than just an infatuation. We rely on our wheels to get us to and from all the places we need to go—including work! If you have a car you must have car insurance to protect you and your property. The average auto insurance premium is about $1,134 per year, but premiums vary based on your deductible, your age, the make and age of your car, your driving history, the state you live in, and the type of insurance you purchase.1
You should choose your type based on how much car insurance you need. The three most basic types of auto insurance you should know about are liability, comprehensive, and collision coverage.
This covers another person’s expenses if an incident is "your fault." You should choose at least $500,000 worth of liability coverage for property damage and bodily injury to save yourself from bankruptcy in the case of an event.
This may look a little confusing when it’s displayed on your insurance coverage limits as "$250,000/$500,000/$250,000" or "250/500/250." When you see this, it simply means:
- $250,000 of coverage for bodily injury (per person)
- $500,000 of coverage for bodily injury (per accident)
- $250,000 of coverage for property damage (per accident)
This coverage kicks in to repair or replace your car if it gets stolen or damaged by a fire, storm, falling tree branches or other natural disasters.
This coverage repairs or replaces your car if you’re in an accident with another vehicle, object or even yourself—no matter who’s at fault. Keep in mind that someone else’s liability coverage will only cover your expenses if the other driver is at fault. And that’s only if they have enough liability insurance to cover you.
Renter’s and Homeowner’s Insurance
If you’re renting a place to live that you don’t own, like an apartment, get renter’s insurance to cover the stuff you do own. Don’t make the common mistake of thinking a landlord’s insurance will cover your belongings if they get destroyed or stolen. It won’t. A landlord’s insurance will only pay to rebuild what belongs to the landlord—the building. Your stuff is your responsibility.
Don’t go without renter’s insurance—it’s so cheap! The current average cost of renter’s insurance is $180 per year. Depending on location, the average monthly rate ranges between $15 and $30 per month.2
But wait, what if you own a home? Then you need to get homeowner’s insurance in place—enough to cover the replacement of your home. Homeowner’s coverage is a little pricier than renter’s insurance (around $100 each month) and it’s most likely factored into your monthly mortgage payment.3
Renter’s and homeowner’s insurance usually provide these three types of coverage:
This covers the cost to repair or replace items including electronics, clothing, furniture, etc.
This covers repairs if you accidentally damage another person’s property or medical bills if you’re at fault for their injuries.
Additional Living Expenses:
This covers costs if you’re at fault for damage that makes the space you rent uninhabitable.
Pro Insurance Tip: Bundle Your Insurance Policies
Before you buy renter’s insurance, ask your agent if you can save money by bundling it with your car insurance. Depending on the state you live in, you could get a 5–10% discount by bundling car and renter’s or homeowner’s insurance—maybe more!4 You need both types of insurance, so grab a discount! An independent insurance agent can help you get the best value on your policies, and may know more tips to help you save.
You absolutely have to have health insurance. Even if you think you’re healthy and fit, medical emergencies can happen out of nowhere and send your finances to the brink. The average monthly cost (or premium) of health insurance for an individual today is $388 for an individual and $1,520 for a family.5
These payments pale in comparison to the thousands—even millions—of dollars a medical emergency could cost you. To give you an idea of what this could look like, HealthCare.gov claims that the average cost of a three-day hospital stay is around $30,000.6
Using a Health Savings Account (HSA) can be a great way to save money on health insurance if it’s available to you. An HSA is a savings account dedicated to health care costs. It allows you to contribute and withdraw money tax-free and qualifies you for a tax deduction! You can use the money to pay for any medical expenses, from Band-Aids to doctor bills. But if you don’t spend all your HSA funds, you can carry them over year to year and even invest them so they grow over the long term!
HSAs work best for folks who are generally healthy because they’re combined with high-deductible health plans that usually have lower monthly premiums. A high deductible—defined by the IRS as at least $1,400 for a single person, $2,800 for a family policy—may seem scary, but it won’t be a problem when you have money ready in your HSA to cover your medical expenses.7
Term Life Insurance
Term life insurance is another basic insurance policy you should know about. The purpose of life insurance is to replace your income when you die. Why should you care about replacing your income? If you have a family that depends on your income, they’ll lose it after you’re gone. If you’re single, you’ll need at least a basic amount to cover your burial costs or any remaining debts so the burden doesn’t fall on your family.
Life insurance prevents financial chaos from adding to your loved ones’ grief of losing you. Since the goal is to replace your income, you should get coverage equal to 10–12 times your income.
One final note on life insurance: Never get whole life (also known as cash value insurance). It’s a complete rip-off. If you compare term life vs. whole life insurance you’ll find that whole life carries a more expensive monthly price tag.
What About Warranties?
Don’t waste money on insurance for phones, tablets, technology, etc. You can cover the cost of replacing or repairing smaller assets that offer warranties by practicing what we teach and having an emergency fund.
What about items like fine jewelry and engagement rings? While covering your engagement ring can be smart, jewelry can often be included in certain types of property and casualty policies like renter’s insurance. Check with your insurance agent to see if yours can be covered without an additional policy.
Get the Right Insurance
Since this is just a quick rundown of basic insurance policies, we haven’t covered all the types of insurance you may need. But it’s a great start. And if you get an independent insurance agent on your side this early in the game, you’ll be well prepared for the long run as you get out of debt and grow wealth. That’s because an independent insurance agent can help you save without losing on coverage.
Ready to get the right insurance with an Endorsed Local Provider (ELP) who has your back? Find an insurance professional near you!