Takeaways
- Insurance policies help limit your financial exposure in case of accidents or emergencies.
- Selecting the best insurance policy requires a balance of premiums and deductibles.
- Insurance policies allow you to manage risk and financial exposure holistically.
- There are insurance policies that help with almost all major financial milestones.
- Creative insurance policy structures can help alleviate financial stress and uncertainty.
What is Insurance?
Insurance is a financial product offered by financial institutions designed to help you manage risk. You can buy an insurance policy to hedge against accidents, disasters, and unexpected life events. If you get into a car accident, your house catches on fire, or your pet accidentally breaks a leg, there is an insurance product to help you offset unexpected costs.
When you buy an insurance policy, you pay a fee, known as an insurance premium, to the insurance company. Premium payments - paid monthly, semiannually, or annually - keep your policy active. An active insurance policy will cover the costs and expenses you might incur during the policy term. However, you might have to pay a deductible first.
If an insurance policy is triggered, you will have to pay what is called an insurance deductible to your insurance company to help cover the expense. Deductibles vary by the type of insurance you purchase (pet vs. life) and within each insurance category (higher vs. lower deductible plans). Insurance companies only start covering costs once the expenses exceed your deductible. Securing the best insurance policy is essential for protecting yourself, your property, and your financial future against unforeseen events. Proper insurance coverage is an instrumental part of sound financial planning.
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10 Types of Insurance
You might need to get more than one insurance policy. Whether you are creating your financial plan or consulting with a financial advisor, here are ten types of insurance policies to consider:
1. Car Insurance
Car insurance helps cover the costs of car accidents. Car insurance gives financial protection for events like accidents, damage, or theft. Car insurance usually comes with liability coverage and is mandatory in most states. Liability coverage covers costs for the other party involved in a car accident if you cause the accident. Besides liability coverage, you can add comprehensive coverage for events unrelated to collisions, such as hail or storm damage. You can also add collision coverage for damage from accidents.
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Add-ons like rental reimbursement and roadside assistance are also available. It is important to note that car insurance does not cover general maintenance or wear and tear. Regular maintenance, such as oil changes and tire rotations, is your responsibility.
Example: Someone sideswipes your car in the parking garage.
Car Insurance May Cover: Costs to fix your damaged car and restore its look.
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2. Renters Insurance
Renters insurance covers damages incurred while renting an apartment, condo, or house. It provides coverage for personal belongings for instances like theft, fire, or other damages. Renters insurance can also offer liability protection if someone gets injured in your rented space and sues for damages. Many policies include loss of use coverage, which helps with living expenses if your rental becomes uninhabitable.
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Although renters’ insurance does not cover the physical building (that is the landlord’s responsibility), it is a crucial tool for protecting your personal property. Some apartment complexes even require tenants to have renters’ insurance before moving in.
Example: There is a leak in the roof, and the water damage destroys your television and electronics.
Renters’ Insurance May Cover: The replacement cost of the television and electronics.
3. Pet Insurance
Pet insurance is a healthcare policy for your dog, cat, or other pet that reimburses you for certain medical expenses. Pet insurance can be a lifesaver in the event of an unexpected illness or injury to your pet, ensuring you can afford the best care available. Coverage options vary, but most pet insurance policies include accidents and illnesses, and some even offer wellness plans for routine care like vaccinations and veterinary check-ups.
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Premiums depend on various factors, including your pet’s age, breed, and the level of coverage you choose. While pet insurance can be a significant financial aid, it is vital to understand what is and what is not covered, so you aren’t surprised if an accident does occur. Pre-existing conditions and routine care are often excluded from standard policies.
Example: Your pup swallows a sock and needs emergency surgery.
Pet Insurance May Cover: The cost of the surgery and recovery visits.
4. Health Insurance
Health insurance covers medical expenses, including routine check-ups, emergency services, and specialist treatments. Health insurance can significantly reduce healthcare costs, making it more accessible. You can get private plans, employer-provided policies, or government health programs like Medicare and Medicaid.
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These plans differ in premiums, deductibles, copays, and coverage limits. Health insurance coverage can be a huge employer benefit, and plans can vary tremendously among employers. It is essential to understand your plan’s specifics, including what services are covered, who are the preferred healthcare providers, and out-of-pocket costs. Health insurance helps manage healthcare costs and promotes regular health check-ups and early treatment, contributing to overall well-being.
Example: You get very sick and must visit the emergency room.
Health Insurance May Cover: The cost of emergency room visits, medicine, and follow-up appointments.
5. Homeowners Insurance
Homeowners insurance provides financial protection for your home and personal property against damage from disasters like fires, storms, and theft [1]. It also covers liability for injuries that occur on your property. If you are trying to buy a house for the first time, it is good to know what most mortgage providers typically insist on homeowners insurance.
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Policies vary, but standard coverage includes the structure of your home, furniture, liability protection, and living expenses if your house becomes uninhabitable. As part of your financial planning, it is crucial to understand what your policy covers because damages from natural disasters like floods and earthquakes often require additional coverage. If you are like most people, the value of your home makes up a significant portion of your net worth. Protecting this asset is a smart money move.
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Example: A pipe bursts and floods your kitchen, damaging all your appliances.
Homeowners Insurance May Cover: The cost of fixing your kitchen and replacing your appliances.
6. Life Insurance
Life insurance can provide much-needed payments to your beneficiaries or spouse. There are many types of life insurance, including term life insurance, which covers you for a set period, and permanent life insurance, which remains in effect for your entire life. Term life is often more affordable but lacks a cash value component, unlike whole or universal life policies. Life insurance can help cover debts and funeral costs and provide ongoing financial support to your dependents.
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Your employer probably provides some life insurance coverage. However, most financial advisors will advocate for an additional individual policy to ensure you have sufficient coverage. Choosing the right life insurance depends on your financial goals, family situation, and overall estate planning strategy.
Example: You are involved in a fatal car crash.
Life Insurance May Cover: Payments to your spouse and children to help them cover your income and necessary expenses.
7. Travel Insurance
Travel insurance protects you from unexpected events while traveling. It covers a range of potential issues, like trip cancellations, lost luggage, medical emergencies, and even evacuation costs. Different travel policies offer varying levels of coverage, so choose one that suits your travel plans.
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For instance, if you are traveling for a fun vacation, you might need a policy that covers the cost of the trip and exclusive activities. But if you are traveling for business, your company might prioritize trip cancellation and lost equipment coverage.
Traveling to Europe for vacation? Insurance is valuable for international trips, where your regular health insurance may not provide coverage. By investing in travel insurance, you can enjoy your trip worry-free.
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Example: Your airline cancels your flights, making you miss a prepaid concert.
Travel Insurance May Cover: The cost of your flights and reimbursement for the concert tickets.
8. Property Insurance
Property insurance - also called business insurance, commercial property insurance, or business personal property insurance - is frequently used by businesses. This type of insurance sounds like its name because it covers physical assets like buildings, equipment, and inventory against damage or loss (think fire, theft, or natural disasters).
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Business insurance helps protect the physical capital necessary to keep your business going in case of an accident. Coverage typically includes your office, storage facility, personal property used for business, and, in some cases, the loss of income due to business interruption. Property insurance is customizable to fit various business needs and risks.
For your everyday life, property insurance is often a part of your homeowners, renters, or flood insurance policy. These policies cover all furniture, electronics, and valuables in your house. But businesses must purchase this insurance separately. For small business owners, solopreneurs, or partnerships, property insurance can help ensure the business continues to run. This hedges against your missing income or having to pay for losses.
Example: Someone breaks into your storage facility and steals all your inventory.
Property Insurance May Cover: The replacement cost of the market value of your inventory
9. Disability Insurance
Disability insurance is a type of coverage that provides financial support if you become unable to work due to illness or injury. This insurance can be short-term for temporary disabilities like recovery from surgery or long-term for more permanent disabilities. Disability insurance benefits usually amount to a percentage of your regular income, helping you maintain financial stability during periods when you cannot work.
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- Short-Term Disability: Pays for a percentage of your income while you recover from a short-term disability. This could be recovering from an accident that does not allow you to work. Short-term disability typically covers 40-60% of your pre-disability income. Short-term disability usually lasts up to six months.
- Long-Term Disability: Typically kicks in after your short-term disability policy has been exhausted. Long-term disability pays for a percentage of your income while you recover from an illness or injury. Long-term disability usually covers 50-70% of your pre-disability income. Most of the long-term disability insurance is not work-related, but instead, it comes from illnesses such as musculoskeletal disorders, heart disease, cancer, and other diseases [2].
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Employers often offer disability insurance, but individual policies are available for broader coverage or if your employer coverage doesn’t cover that much. It is particularly important for individuals with high-risk jobs or those without a significant financial safety net. Disability insurance ensures a continuous income flow even when you cannot work.
Example: You are suddenly diagnosed with an autoimmune disorder that leaves you unable to work full-time.
Disability Insurance May Cover: A percentage of your income while you recover from your illness, both in the short and long term.
10. Long-Term Care Insurance
Long-term care insurance is specifically tailored to handle the expenses of care services not usually covered by standard health insurance, Medicare, or Medicaid. Long-term care insurance helps when you or your spouse can no longer perform everyday functions like bathing, dressing, and eating. This usually happens due to aging, chronic illness, or disability. Long-term care can be given in your home (with a live-in nurse), nursing homes, or assisted living facilities.
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As you get older, the chance you will need assistance increases dramatically. By getting long-term care insurance, you can make sure that you can afford the best solution for you. It is a smart money move for your retirement plan to make sure these expenses are buffered by long-term care insurance.
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Example: After you retire, you find it hard to conduct everyday activities.
Long-Term Care Insurance May Cover: The moving costs into a long-term care facility.
Smart Summary
Insurance coverage, in the proper areas, can boost your financial health and reduce anxiety. Insurance can provide the cash you need in moments of uncertainty and give you the clarity to handle tough situations. You can protect yourself even more with an emergency fund and a slush fund, helping to offset the need for immediate cash relief. Planning for the unexpected is a smart money move.
(1) Insurance Information Institute. Which disasters are covered by homeowners insurance? Last Accessed December 16, 2023
(2) Council For Disability Awareness. Disability Statistics. Last Accessed December 17, 2023
