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Insurance is like a life jacket. It’s a bit of a nuisance when you don’t need it, but when you do need it, you’re more than thankful to have it. Without it, you could be one car wreck, illness or house fire away from drowning—not in the ocean, but in debt.
But for something so essential to our financial well-being, insurance is a complicated—even uncomfortable—topic. So we’ve boiled your options down to the eight types of insurance policies you can’t go without.
While each one is a must-have, you should consult an independent insurance agent to help you find the right types of insurance customized to fit your needs.
Here are the eight types of insurance Dave Ramsey recommends:
- Auto Insurance
- Homeowners/Renters Insurance
- Umbrella Policy
- Health Insurance
- Long-Term Disability Insurance
- Term Life Insurance
- Long-Term Care Insurance
- Identity Theft Protection
Find out more about how each of these can help you and your family below!
1. Auto Insurance
Never drive around uninsured—not just because it’s against the law, but also because the Insurance Information Institute reports the average loss per claim on cars is around $4,900. Imagine having to pay that kind of money out of pocket! There are several options to choose from when it comes to auto insurance, so there’s no reason to go without it:
- Liability coverage. If you’re responsible for an accident, your liability coverage will cover the costs of any injuries or property damage caused in the collision. Most states require you to carry a minimum amount of coverage, so check with your insurance agent to understand your basic requirement.
- Collision coverage. This covers the cost to repair or replace your car if it’s damaged or destroyed in a wreck.
- Comprehensive coverage. This level of insurance covers your losses that aren’t caused by a wreck such as theft, vandalism, flood, fire and hail.
Again, an insurance agent is a good resource to help you determine the level of protection you need based on the type of car you drive. Read More: How Much Car Insurance Do You Really Need?
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2. Homeowners/Renters Insurance
Be sure your homeowners policy includes extended dwelling coverage. Extended dwelling coverage adds an extra layer of protection above your policy limits.
With extended dwelling coverage, the insurance company will replace or rebuild your property even if the cost exceeds your policy’s coverage. There is a limit to how much they’ll pay, however—usually 20–25% above the amount you’re insured for unless you opt for more coverage. Keep in mind, the higher your home’s value, the higher the need for extended dwelling coverage.
Another note about homeowners insurance: Check with your agent about what your policy covers and what it doesn’t.
- Flood Insurance. Most homeowners don’t know that flood insurance is excluded from their policies. Flood insurance is also different from water backup protection. Ask your agent to go over the details with you.
- Earthquake Coverage. Depending on where you live in the country, earthquake coverage might not be included. If you need it, check with your agent to include it.
If you’re a renter, you’re not off the hook for insurance. Without renters insurance, it’s up to you to replace your belongings if they are lost in a fire, flood, burglary or some other disaster. A good independent insurance agent can walk you through the steps of covering the basics of both homeowners and renters insurance.
Remember, if your full emergency fund is in place, you can take a higher deductible and lower the premium on your policy to save money.
3. Umbrella Policy
An umbrella policy is a type of insurance that adds an extra layer of protection for you and your assets when you need coverage that exceeds the limits of your homeowners or auto insurance. For example, if you’re at fault for a multiple-vehicle accident, medical bills and property damages could quickly add up to more than your auto insurance will cover. If you’re sued for the difference, your savings, your home and even your future wages could be at stake!
You can protect yourself from a situation like this with a personal liability umbrella policy. In fact, Dave recommends an umbrella policy for anyone with a net worth of $500,000 or more. For a few hundred dollars a year, an umbrella policy can increase your liability coverage from the standard $500,000 to $1.5 million. Talk with an Endorsed Local Provider to determine the type of insurance coverage that’s right for you and your family.
4. Health Insurance
Medical debt contributes to nearly half of all bankruptcies in America according to the Kaiser Family Foundation. If you’re uninsured, you’re leaving yourself vulnerable to potential financial catastrophe. One unexpected major medical emergency could amount to hundreds of thousands of dollars of expenses. Don’t put yourself in that situation.
The high cost of medical insurance isn’t an excuse to go without coverage—even if you don’t go to the doctor often. One option is a high-deductible health insurance plan combined with a Health Savings Account (HSA). With a high-deductible plan, you’re responsible for more of your up-front healthcare costs, but you’ll pay a lower monthly premium.
A high-deductible health plan qualifies you to open an HSA—a tax-advantaged savings account specifically for paying medical expenses. Speak to an independent insurance agent about high-deductible health plan options you can combine with an HSA. Other HSA benefits include:
- Tax deduction. You can deduct HSA contributions from your gross pay or business income. In 2017, the tax deduction is $3,400 for singles and $6,750 for married couples.
- Tax-free growth. You can invest the funds you contribute to your HSA, and they grow tax-free to use now or in the future.
- Tax-free withdrawal. You can use the money tax-free on qualified medical expenses like health insurance deductibles, vision and dental expenses.
Some companies now offer high-deductible health plans with HSA accounts as well as traditional health insurance plans. Compare your options and see if a high-deductible plan could end up saving you money.
5. Long-Term Disability Insurance
Long-term disability insurance protects you from loss of income if you are unable to work for a long period of time due to an illness or injury. Don’t think a permanent disability could sideline you and your ability to work? According to the Social Security Administration, just over one in four of today’s 20-year-olds will become disabled before reaching age 67.
Those odds are too high for you to skimp on long-term disability insurance. If you’re in your prime wage-earning years, a permanent disability could potentially derail your dreams of home ownership or paying for your kid’s college.
Bottom line: make sure you’re covered. Many companies offer long-term disability insurance to their employees, so start there.
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As you look into your options, you’ll also find short-term disability insurance designed to fill in income gaps caused by an illness or injury that keeps you out of work for three to six months. That’s insurance you can skip—especially when you have a fully funded emergency fund to cover your needs.
6. Term Life Insurance
Many of us take life insurance too lightly. The Insurance Information Institute reports that 30% of Americans carry no life insurance. Think about it: If you were to pass away unexpectedly, how would your spouse pay for monthly expenses without your income? In the dark moments of grief, the last thing your spouse should worry about is surviving financially in your absence. With a term life insurance policy for 10–12 times your yearly income, your family won’t have to worry about making ends meet, losing their home or changing their college plans if you’re not there to provide for them.
Make this a priority. Talk to an independent insurance agent about term life insurance today. It’s affordable and will provide priceless security for your family. When you shop for life insurance, don't forget, term life insurance is always a much better deal than whole life insurance.
What about singles with no dependents? If you have a ton of debt and no savings, consider a small term life insurance policy. A healthy 30-year-old can easily find an affordable policy that will at least pay off your debt and cover your burial expenses.
If you’re debt-free and have enough cash to pay for your burial, you can hold off on life insurance, but why would you? The younger you are, the more affordable term life insurance is, so there’s no reason to wait until you have a family to get insured.
7. Long-Term Care Insurance
Long-term care insurance covers a range of services like nursing home care and in-home help with basic personal tasks like bathing, grooming and eating. Usually, long-term care refers to any ongoing assistance for those who have a chronic illness or disability. It’s expensive, and long-term care costs are not generally covered by Medicare.
So who really needs long-term care? To protect your retirement savings from the expenses of long-term care, get long-term care coverage no later than age 60. Remember that while you’re not likely to need long-term care before then, many factors—like your health and family history—go into your decision when to buy long-term care insurance—and how much you’ll pay for it.
That’s why it’s important to talk to an insurance professional like an Endorsed Local Provider about long-term care that fits your personal situation. And even if you’re not close to this stage of life, your parents might be, so take time to investigate their long-term care options too. Read More: How to Talk to Your Parents About Money
8. Identity Theft Protection
According to a 2017 Identity Fraud Study released by Javelin Strategy and Research, identity thieves stole $16 billion from 15.4 million US consumers last year. Cybercrime and identity fraud are real threats—even if you’re careful about protecting your personal information. National retail stores are under constant attack by industrious hackers who break into their payment systems, leaving millions of people vulnerable to theft.
Think about it: With a few important bits of information about you, criminals have all they need to ruin your finances by taking out a mortgage in your name, receiving medical care or filing a false tax return.
Cleaning up an identity fraud situation could take years to handle on your own, so make sure your insurance includes restoration services that assign a qualified counselor to clean up the mess for you.
One Final Point to Remember
One word of caution: Stay away from gimmick policies like cancer insurance, accidental death or anything that packages your coverage with investments like whole life or universal life. These types of insurance policies are just a way for the seller to make extra money off you. You need an agent who’s on your side—not the side of the insurance company.
That’s why choosing the right independent insurance agent is so important. An industry expert, like one of Dave’s Insurance ELPs, will work with you to make sure you have the policies that fit your life now and help you anticipate the coverage you’ll need for the future. Plus, if you ever have to file a claim, you’ll have an advocate on your side who will guide you through the process.