worth hiring an insurance agency

The 8 Types of Insurance You Need and 8 That are a Waste of Money

Insurance is a booming business in the U.S. Last year, $1.2 trillion in net premiums were written. Life and health insurance accounted for 52% of that while property and casualty insurance accounted for the other 48%. But what if you invest in insurance to protect yourself against a loss and then nothing ever happens? Then, you’ve paid for nothing.

So, how do you decide which policies will actually help you? The answer to that question varies widely depending on your income, assets, priorities, and personality. A good rule of thumb is to only buy insurance when you can’t afford the loss.

Read on to learn eight types of insurance you should consider and eight types that may be a waste of money.

8 types of insurance you need

Following are 8 types of insurance that you shouldn’t skip!

1. Car insurance

Auto insurance requirements vary from one state to the next, but most require liability at the very least. If you cause an accident, liability insurance covers the costs of the damage you cause to the car or the person.

You may want or need to go a step further and get full coverage (comprehensive and collision). If you are financing your vehicle, lenders will require it to protect their investment.

Collision coverage covers damage to your vehicle if you are at fault for the accident. Comprehensive coverage pays for damages caused by theft, falling objects, or fire.

If you own your car in full, you will have to weigh the costs and benefits of additional coverage to decide if it makes sense for you. The average cost for car insurance nationwide is $900 per year. However, the cost will vary depending on your coverage, your vehicle, where you live, and your driving record.

2. Health insurance

The Affordable Care Act (ACA), also known as Obamacare, was enacted in 2010. It included a health insurance mandate which requires Americans to have a base level of coverage. This went into effect in 2014. If the minimum requirements are not met, individuals are charged a penalty on their income tax returns.

However, this mandate was repealed by President Trump so will no longer be in effect in 2019. Note, the requirement does apply for 2018. If you don’t have the proper coverage, you could face the penalty of $695 per adult, $347.50 per child, and up to a maximum of $2,085 per family or 2.5% of a household’s income.

Beyond the requirements by law, health insurance is a helpful coverage to avoid large out-of-pocket costs. Medical care in the United States is expensive, and doctor visits are inevitable. The average cost is $4,358 per year.

3. Home/rental insurance

Your home is your safe haven and a large investment. You want to protect it against damages and ensure that if a catastrophe occurs, you will be able to rebuild or replace it.

Homeowners insurance protects against property damage due to covered events. It also offers liability protection for property damage or bodily injury. But how often will you file a claim? One in 15 homeowners with homeowners insurance files a claim each year.

The average premium for homeowners insurance is $1,173 per year, and the average amount of a claim is about $10,500.

This is one of the insurance types for which the costs justify the risk. Plus, if you don’t own your home in full, like 70% of Americans, your lender will require a minimum amount of homeowners insurance to protect their investment.

As for renters insurance, landlords often have insurance for the physical property but not for a renter’s belongings. That’s where a renters insurance policy comes in. It also often includes liability protection.

The average renter’s insurance premium is $188 per year so it is very affordable and can help you protect your home’s contents.

4. Life insurance

Life insurance enables you to leave money to a beneficiary when you pass away. This ensures that those closest to you don’t suffer financial difficulties as a result of your passing. The proceeds are usually spent on replacing your income while the family mourns and adjusts, the costs of a funeral and burial, paying off a mortgage, and more.

If you are the primary provider for your family, you will want to make sure your dependents can stay afloat. Plus, the average funeral in 2017 cost in the ballpark of $8,755. You don’t want to leave your family scrambling to cover those costs in a difficult time.

Buy term and invest the difference

Avoid hybrid policies that mix life coverage and investment accounts by offering an additional cash-value to the policy. Unless you are already maxing out your 401(k), 403(b), SIMPLE IRA, SEP IRA, and other self-employed 401(k) plans, there is no reason to get a cash-value policy for the tax benefits.

Instead of paying expensive fund management fees, invest in a low-cost indexed fund. Just because the expression “buy term and invest the difference” has become a cliché doesn’t make it any less true. Insurance companies like Haven, Ladder, and Bestow offer inexpensive term life insurance policies that get the job done without unnecessary extras.

The cost varies greatly depending on the type of policy you choose, your age, and more but can range from $400 to $4,500 per year.

5. Disability insurance

The Social Security Administration reports that one out of four 20-year olds today will become disabled before the age of 67. Disability insurance protects you from a total loss of income if you can’t work for an extended period due to an accident, illness, or injury. If you rely on your paycheck, you should have this coverage.

Currently, there are 8.7 million disabled workers in the U.S. with 1.7 million dependents who are receiving social security benefits. The average monthly benefit is $1,198.

You never know what is going to happen in life and if you can’t work due to some unforeseen circumstance, disability insurance will support you. Being that 25% of people become disabled at some point, it’s better to be prepared.

6. Umbrella policy

An umbrella insurance policy helps to protect you beyond the limits of your other insurance policies (auto, home, watercraft, etc.). It offers coverage for injuries, property damage, and some personal liability situations.

For example, if you are sued because someone gets hurt while swimming in your pool and the damages exceed your homeowners insurance policy, an umbrella policy can kick in to cover the difference. It also provides coverage for claims that are not covered under other plans (e.g., arrest, slander, libel, etc.).

This can protect you, your financial future, and your assets against expensive lawsuits. The cost ranges from $150 to $300 for a $1 million policy. The more wealth you accumulate, the more important this policy becomes.

7. Long-term care insurance

Long-term care insurance (LTC) is usually not covered by health insurance. For those unfamiliar, LTC encompasses a variety of services to help a person take care of themselves when they can no longer do so on their own. For example, helping an individual to bathe, get dressed, use the bathroom, make meals, and get around.

The average estimated amount spent on long-term care is $140,000 and 37% of people over 65 will incur out-of-pocket long-term care expenditures.

While the premium is on the pricey side ( $2,700 per year), it can safeguard your financial future. Start looking for coverage in your 50s or early 60s, as once you hit 65, the premiums increase by about 10%.

8. Flood insurance (when necessary)

Protection against floods is not part of most homeowners or renters insurance policies. You have to get a separate dedicated policy. But, if you don’t live in an area prone to floods and have never had a problem with flooding, chances are you won’t need it. For example, in 2016, Louisiana had 35,155 claims which amounted to $804 million while North Dakota had 3 claims that amounted to $0. Should you have flood insurance if you live in a flood-prone area? Yes. However, it may be an unnecessary expense if the likelihood of flood damage is low.

Check the frequency of flood claims in your state to see if you need it or not.

Now that we’ve covered the insurance types that often make financial sense, let’s look at some that don’t.

8 types of insurance you probably can do without

In most cases, you can do without these insurance types. This is not to say they are worthless. Just one big claim can justify buying any of the insurance policies below. However, it is probably better for you to invest what you would pay in premiums in an emergency investment fund.

1. Credit card insurance

Credit card insurance pays your credit card bill if you can’t pay it. However, most credit cards have low minimum payment amounts which enable you to stay current without paying much. Further, it’s better to take preventative action by keeping your credit card balance at a manageable level. This insurance tops the list as a waste of money.

2. Disease insurance

Insurance policies exist that cover specific diseases such as cancer, a heart attack, an organ transplant, and coronary bypass surgery. They are meant to cover critical medical services and treatments that aren’t covered by a traditional policy.

While the premiums are on the affordable side, these plans come with many stipulations and only cover a narrow range of illnesses. If you don’t meet all the requirements, you will be out of luck. Instead, you can better protect yourself with a good medical policy and long-term disability insurance.

3. Life insurance for kids

Life insurance policies are available for children and provide the beneficiary with a death benefit if the child passes away. When the child reaches adulthood, you can often convert the policy to a regular one without the need for a medical interview or examination.

The need for this coverage is slim to none. Most young adults can qualify for a life insurance policy without any issues and the odds that a child will die at a young age are small. In this case, you can usually save more money by building an emergency fund that you can use for any type of crisis.

4. Mortgage life insurance

If you die, mortgage life insurance pays off the balance of your mortgage. However, you don’t need a separate policy for that. A decent life insurance policy will provide a death benefit large enough to pay off your mortgage balance along with other expenses.

5. Extended warranties

Many electronic devices and appliances come with an extended warranty. While you might get some peace of mind in knowing that your new purchase is protected, in most cases you won’t need the warranty. Weigh the costs and benefits. If you buy a trusted brand, you probably don’t need it.

6. Accidental death and dismemberment insurance

If you pass away and the cause of your death is an accident, this insurance will pay benefits to your beneficiary. However, unless you work in a potentially hazardous environment, you can get adequate coverage through your life insurance policy.

7. Identity theft protection

Identity theft insurance reimburses victims for money they lose as the result of identity theft. Policies often cover legal bills, notary bills, credit monitoring services, lost wages, copies of your credit report, and more. Not every policy is the same so be sure to compare the coverage and costs of multiple providers. Although it doesn’t hurt to have, this insurance is typically included for “free” with credit cards and bank accounts, or as an inexpensive rider in your home insurance. Many credit reporting services, such as MyFICO and Credit Sesame — which offers it for free — bundle it with their other credit monitoring tools.

The cost for coverage ranges from $10 to $100 per month and deductibles range from $100 to $500. Although it helps to have someone protection, especially as problems with identity theft have increased in recent years, you probably have bigger insurance needs to cover first.

8. Flight insurance

Lastly, flight insurance is a type of travel insurance that pays a benefit to your family if you die during a flight. However, flight accidents are few and far between. In 2017, there were 3.19 accidents per million commercial flight departures. Don’t waste your money! Life insurance can cover you in most situations.

Find the right insurance policies for your needs

Now you know eight types of insurance that are cost-effective and eight that you can reasonably do without. You can figure out if any insurance policy is worth it by uncovering the following:

  • What value does the policy offer?
  • How much does it cost?
  • Is it required by law or another organization (e.g., lenders)?
  • How likely is it that you will need to file a claim (statistically)?

The key motivating factor that drives many people to sign up for an insurance policy is fear. Fear that they will become financially unstable due to an unexpected event. While it’s true that life can throw you some curveballs, you don’t need every policy out there.

By analyzing the level of risk and comparing it to the cost, you can identify which policy will truly benefit you and which will be a waste. We’ve got you started with these 16 insurance types.

Want to learn more about what policies are available? Compare insurance products here.

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