The Money Hawk

Five Insurance Policies You Must Carry To Avoid Financial Disaster

Posted on 14. Nov, 2008 by Kevin Geary in Money Management

It doesn’t really matter how financially responsible you are in terms of making money, staying out of debt, and investing for the future if you lose it all in an accident or unfortunate event. Unfortunately, this happens to millions of people every year.

Some people just aren’t aware of what types of insurance they need while others are aware, but choose not to carry certain types of insurance because they don’t expect they’ll need it. I’d caution against this type of thinking. The best insurance rule to follow is, “it’s better to have it and not need it than need it and not have it.” When you consider bankruptcy as an alternative to carrying proper insurance policies, that rule gets even more important.

Here are five insurance policies you must carry to avoid financial disaster:

1. Home/Renters Insurance

Almost everyone purchases home insurance policies because it’s generally required if you carry a mortgage on the home. On the other hand, renters insurance is often overlooked.

Renters insurance covers the value of your personal items as the renter of the property. It also covers property damage as a result of an accident or negligence (check your individual policy to make sure this is the case).

If you carry homeowners insurance or renters insurance, your personal belongings and property are covered in the event of an emergency.

TIP: If you live in an area susceptible to floods, you must purchase a separate flood insurance policy. Typical homeowners insurance policies don’t cover floods. Here’s an interactive tool that shows you the potential cost of flood damage if you don’t have insurance.

2. Auto Insurance

Again, most people have an auto insurance policy because it’s required by law in most states. However, the different types of coverage you can choose from may make or break you after an accident.

The three types you need to carry no matter what are:

LIABILITY
This covers damage to another persons property or injuries to others in an accident. As your net worth grows, you need to make sure to increase the amount of this coverage to keep yourself secure. This is very important because if your liability insurance falls short your personal assets, including your home, can be seized as payment.

MEDICAL PAYMENTS
If medical expenses are incurred by anyone involved in the accident, having this coverage will make sure they’re taken care of. This policy works regardless of fault.

UNINSURED / UNDERINSURED MOTORIST
Just as the name implies, this coverage protects you from losses incurred by a motorist who is either uninsured or underinsured. This will also cover you in the case of a hit and run where the other motorist is never located.

One type of coverage that is optional is:

COLLISION / COMPREHENSIVE
Collision covers the damage to your vehicle in an accident with another automobile or inanimate object such as a fence, median, or tree. Comprehensive covers damage to your vehicle from other means, such as fire or a falling object.

In order to decide whether you need this type of coverage and the amount, you need to compare the cost of the coverage to the value of the car. If you drive a car worth $2000, it may not be cost-effective to pay for this type of coverage because you’ll end up paying more in premiums than the car is worth were it to be damaged.

If you aren’t sure what to do, then follow the aforementioned rule of insurance, “it’s better to have it and not need it than need it and not have it.”

3. Health Insurance

Health insurance is probably going to be one of your most expensive forms of insurance. For this reason, many people opt not to purchase it. That’s a big mistake.

“Unless you’re Bill Gates, you’re just one serious illness away from bankruptcy,” said Dr. David Himmelstein, the study’s lead author and an associate professor of medicine. “Most of the medically bankrupt were average Americans who happened to get sick.” ((Source – 50% Bankruptcy From Medical Bills))

One major accident or illness experienced without health insurance can bankrupt you. Is that motivation enough to make sure you’re covered?

I personally have an HSA for myself and my family. If you’re relatively healthy, an HSA has great advantages over standard health insurance. I’ll be writing an article on why I switched to an HSA in the near future so keep up with this site to learn more. For now, just make sure you’re covered!

I purchased my health insurance through ehealthinsurance.com and highly recommend them; they’re wonderful to work with and make getting a new policy a breeze.

4. Term Life

A life insurance policy is a must if you have dependents. Its importance should not be under-rated. Unfortunately, many people go without it and studies show that those who have it don’t carry enough of it.

In the last two years, 11 percent of American households shopped for life insurance but only 8 percent bought – about 890,000 households out of 111 million. ((Source – New Life Insurance Policy Account Rates))

Not having life insurance means leaving your family up the creek when you die, possibly even causing them to lose their house if they can’t make the mortgage payments. That’s not cool.

The only life insurance policy you need is a “term” life insurance policy. All the others are rip offs. Life insurance policies are horrible investments so stay far away from any life insurance investment vehicles.

As a general rule, you should purchase 10 times your annual income in life insurance. For example, if you make $50,000 per year, you should purchase a $500,000 policy. Term life insurance is extremely cheap, there is no reason to go without it.

5. Long Term Disability

This is probably the most overlooked insurance policy. Long term disability insurance covers you in the case that you’re disabled and can no longer perform work for an income.

Any financial advisor will tell you that your income is your most precious asset. Suffering a disability can take that asset away from you. Having a long term disability policy in this case can save your butt big time.

Private long term disability insurance is a good idea even though social security has a disability program and you may have a disability program through your employer. Employer disability programs are usually short term, meaning they expire after a certain amount of time, which leaves you high and dry.

As for Social Security, I don’t recommend relying on the government for much of anything. There are strict guidelines you must meet in order to receive SSDI payments, and many people are not granted any benefits. It can also take months to get approved.

Instead of playing the government’s game, do yourself a favor and purchase your own long term disability insurance policy.

Conclusion

Don’t spend your entire life trying to build wealth only to lose it all in an accident that is more likely to occur than you think. If you don’t want to watch your entire financial life go down the drain, make sure you have these policies in place and that your coverage is adequate for your particular situation.

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Tags: auto insurance, health insurance, home insurance, HSA, Insurance, long term disability insurance, MEDICAL, renters insurance, term life insurance