Let me just start by admitting that insurance is a HUGE topic and there’s no way I can cover it all in one post without it turning into a book. The goal in this article is to cover the basics of what insurance in general is and when it’s important for everyone to have insurance.
What is Insurance
All “insurances” are basically an agreement between you and a company. You pay the company a set amount of money, called a “premium”, and they agree to pay you a certain amount if something happens to the person or object you are insuring.
Most insurance premiums are due monthly or every six months.
Why does insurance exist?
Insurance exists because disasters are expensive. If insurance didn’t exist and you wrecked your car, you might be stuck having to pay thousands of dollars to replace it, plus possibly thousands more in medical expenses. If your house burned down and you didn’t have insurance, you would be faced with replacing the house and everything in it with your own money. Very few of us have that kind of cash lying around.
Basically, when life dumps us in the deep end, as it sometimes likes to do, insurance acts as the life vest that brings us to the surface again. Without it, we could wind up in debt or bankrupt.
What can be insured?
Almost anything can be insured, as long as it has value of some kind.
Home, car, boat, motorcycle, and RV insurance all exist in case something drastic happens to any of those possessions. Any vehicle you own will need insurance.
You can buy renters insurance in case your possessions are ruined while you’re renting. In fact, many landlords require their tenants to show proof of renters insurance before they are allowed to move in.
If you own any valuable art, jewelry, or collectibles, you can usually insure those.
Some people buy pet insurance which helps keep costs down if their pet becomes very ill.
Travel insurance can be a good option if you’re going on a big trip because it keeps you from being stranded if part of your plans falls through.
You can even insure yourself and your family with health, disability, and life insurance.
Psst. Don’t understand a term or phrase in your insurance documents? Check out the National Association of Insurance Commissioners’s glossary. Many insurance companies also provide glossaries of terms they use. Don’t sign until you know!
What kinds of insurance do I need?
There are a couple types of insurance that everyone should have. Which additional types you need depends heavily on your stage of life.
Currently, everyone in the US is required to have health insurance or face a fee at tax time. Most of us will get this benefit through our employers, but those who don’t can buy their own through the Health Insurance Marketplace. Open enrollment only happens once a year, but if you experience a “life-changing” event, such as marriage, the birth of a child, or losing a job, you can get special permission to enroll outside of that enrollment period. I know it’s expensive, but a medical emergency can destroy your savings. The last thing you want to be worried about in a medical crisis is money.
You only need this type of insurance if you own a car, but most Americans do, so I figured I’d include it here. It is illegal to drive a car without insurance, and cars are expensive enough to maintain without having to pay out of pocket should it be in an accident. Most car insurance will also provide some coverage for injuries or other medical costs resulting from an accident. The same applies for any vehicle you drive, whether it’s on the road or water: insure it!
Homeowners or Renters insurance:
Everyone should have one of these, since we all either own or rent our homes. It’s obvious why you would want homeowners insurance, since a home is a massive investment and losing it to a disaster would destroy the finances of most people. A lot of renters, however, tend to skip buying renters insurance. If you’re one of those people, I would strongly recommend getting at least a little bit. You might be surprised how cheap renters insurance is and what it covers. Don’t let a burst pipe, fire, or natural disaster leave you with nothing but an empty wallet.
Some people need…
Personal property insurance:
If your homeowners or renters insurance doesn’t provide enough coverage or has exceptions for certain types of disasters or events, you might want to purchase extra personal property insurance to make sure you’re covered for all possibilities.
Valuable personal property insurance:
This kind of falls under the previous category, but it’s more focused on special, valuable items you own, like collectibles, art, jewelry, cameras, instruments etc. Usually, these items have to be worth over a certain amount to qualify for valuable personal property insurance. Otherwise, they would just fall under regular personal property insurance.
These things don’t have to be worth a million dollars to count as valuable. Many people insure their wedding or engagement rings, and remember, if you use expensive equipment like instruments or cameras to create income, those things are much more valuable to you than just their sticker prices!
Most of us will need life insurance at some point. It usually pays out after the death of the insured person and is meant to help keep a family financially stable even when the breadwinner has died.
Most people buy life insurance during the years they have dependent children or when a spouse or parent is relying on their income to survive. When you’re single or in a coupled situation in which the death of one partner would not cut off the only income, life insurance is less important.
Some jobs will provide life insurance as a benefit, but even if we have to buy it ourselves, all of us with living family should at least consider having life insurance, especially if our jobs involve physical risk. Even a few thousand can make a difference to those left behind who will have to handle funeral and other estate expenses, all while grieving.
Long-term disability insurance:
This one is a little like life and health insurance combined. It will help provide income in the case that you become unable to work for long periods of time. This is especially important if you are the only source of income for your household. Long-term disability is another type of insurance that employers will sometimes offer.
Some people have never heard of travel insurance, and others never go anywhere without it. Travel insurance comes in a wide range of flavors that cover anything from canceled trips, to lost luggage, to medical emergencies abroad.
If you’re planning to go abroad, especially for several weeks or a month, it might be a good idea to look at buying some travel insurance in case something goes wrong and you find yourself stuck in a foreign country and having to replace your whole wardrobe or buy last-minute tickets to replace your canceled ferry or flight.
You can buy travel insurance from your insurance company, but some credit cards provide free or discounted travel insurance on trips booked with their cards, so check your card benefits before booking.
Of all the insurances we’ve talked about here, this one is probably the least necessary. A dog or cat of average health and life-expectancy won’t cost enough over its lifetime to make pet insurance worth the cost. However, insurance is always meant to protect against huge, catastrophic costs, which can happen with pets who develop a serious illness or need surgery.
If you get a specific breed that is known for having medical problems, you might consider getting some level of pet insurance, but remember that those breeds will cost more to insure because the insurance companies know that they are more likely to need treatment. In most situations, setting aside a little cash in “Fido’s Emergency Fund” is a better option for covering expenses than buying pet insurance.
Should you decide to get some or all of these types of insurance, consider buying them all through the same insurance company. Most big companies will offer discounts for customers purchasing multiple types of insurance. Just be aware that the company might try to up-sell you on policies you don’t really need because they’re “deals”. As always, shop around for the best price, and don’t be afraid to ask questions!
It can be tempting to think of insurance as a luxury. Watching money leave your account every month to pay for something that may never happen can be frustrating. Resist the urge to “save money” by dropping your insurance, though.
If a disaster does strike, you will spend far more money recovering without insurance than you would with it. Plus, there’s something to be said for the peace of mind that comes with knowing that, if something should happen, the cost of recovery will be the least of your worries.