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Insurance...Which Ones Do I Need?



The insurance industry can be a confusing industry. There are a lot of products available that you can choose from. Some of these products are great, some are gimmicks.

But which are which? That is hopefully what this article will answer.

First off, what is insurance?


Insurance is all about transferring risk from you to someone else. The amount of insurance you need will depend on how much of the risk you want to carry compared to paying someone else to carry the risk. This is both from a financial stand point and from a time stand point. Your time is valuable so that should factor into this. This goes for every type of insurance.

So, which ones do you need?


There are some basic categories of insurance that most people should have. They are the following:


Health Insurance

Everyone needs some way to pay for medical expenses. It is one of the biggest causes of bankruptcy. There are multiple options for having health insurance that you should look into from your employer to your religious beliefs.


The main way most humans are going to have health insurance is through your job. If you work for someone else, they usually provide a discounted plan for their employees. Sometimes the employer will cover 100% of the cost, and others you are responsible for a percentage of the overall cost.

There are usually multiple plans your employer will offer from a low monthly cost plan to a high monthly cost plan. The less the monthly cost, the more you are going to have to pay at the time of medical needs. You will have to weigh these costs with your current health situation. If you are healthy person, you are most likely going to be fine with the option that has the lowest monthly expense for you. If you are in the hospital every year, you are probably going to want to opt for one of the more expensive plans.

These decisions are very much an individual and unique to each human. Choose the one that lets you sleep the easiest at night but isn't over paying for something you don't need. We can help you decide this if you schedule an appointment with us.


There are other health insurance options outside of your job (or if your job does not provide them).


One way is to get health insurance through a company yourself. A lot of health insurance companies offer stand alone insurance for individuals. These are very much like the employer provided options, but you have an infinite number of options at varying price points and coverages.


If you are a healthy person, I would suggest looking into a high deductible plan that includes an HSA savings account. The HSA account has a lot of benefits for health reasons and retirement reasons.


There are also options to get into a shared cost health plan. Quite a few religious organizations offer these style, although these style plans are not limited to religious organizations.


Basically, this is where a bunch of people get together and invest money into a "single" account. When one of these people get sick, this account pays for that expense. There are quite a few benefits to a plan like this, but they also usually carry quite a few lifestyle restrictions. For example, a few that I have seen eliminate the consumption of drugs and alcohol. So be prepared if you go this route, that you may have to change your lifestyle.


There is also the option of self insuring through medical issues. I would caution against this option for most people due to the cost associated with most hospital stays. A lot of times you are looking at $100,000+ by the end of a single hospital stay. Normal medical expenses you will probably be fine with, but it is important to be aware that you may lose everything overnight if you need to go to the hospital and don't have a very healthy savings.


All of the other types of health insurances (Cancer, heart, etc) are gimmicks. Your normal health insurance should cover all of those things, don't pay extra for something that is already covered.


You should also have long term disability insurance in place as well. This is again one of those things that most employers provide in their benefits packages. If they do not, get it third party. If something tragic happens to you and you can't work, you need some way to pay bills. Long term disability is that way.


We can help you decide what health insurance is right for you, schedule an appointment here.



Car Insurance

First of all, it is illegal to drive a car without a minimum amount of proof of financial ability to pay for damages or liability in an accident, usually this means carrying car insurance. Most states require car insurance no matter what, some just require proof that you can cover the cost through assets. (minimums are usually set by each state, so check with your state's DMV).


Arizona requires at least liability insurance.


Either way, this is all about transferring risk from you to an insurance company. You need to look at how much is your car worth? Can you cover the cost to replace it without it being a financial burden? How much is car insurance going to cost you compared to what it provides?


All of those questions again come back to each individual. If you have a vehicle worth $1000, you aren't going to want to pay $1000 every year to cover it with the best insurance. You are probably going to want the minimum. But if getting decent coverage is only going to cost you like $200 a year, it might be worth getting the better coverage. It would take 5 years for that insurance to cost you $1000.


Each time you change part of your car insurance, you will need to look at how much does that increase the yearly cost compared to how much would you have to pay if something happens. If it is a small difference, it might be worth transferring that risk to the insurance company for a small increase in cost.


For most people, these would be my suggestions:


Carry as much liability as you can afford, it is relatively cheap. Compare it to an umbrella policy though, there is a break even point and the umbrella policy usually covers home and auto.


Most of the time, somewhere between the $500-$1000 deductible range is the sweet spot with vehicle insurance. The costs are not significantly different to the amount you'd have to pay if you need to use the insurance.


Road Side Service is nice and usually it is less than $20 a year. AAA, AMA, and other companies do offer similar products with some other benefits. Just be prepared, if you need it, you will probably wait at least a couple of hours to get someone to you. So it isn't super quick.


Medical coverage is optional to me. Most of the time you already have medical coverage in your health insurance plan and that covers all expenses before your vehicle medical kicks in anyway. But check with your state about that, as the order of who (health or car insurance) covers first can change state to state.

Rental Car plans are also optional. Usually you can get a rental car for fairly cheap just out of pocket. But it is nice not having to worry about that. This option is also pretty cheap just like road side service.

Also, a lot of times if you have this, your insurance will also cover any rental car, even when you travel. So you don't need to get the rental car insurance. Some vehicle insurance requires this option to cover travel rental cars, others just cover travel rental cars no matter what. Some will never cover travel rental cars. Check with your provider to find out what your insurance covers for rental cars.


We can help you decide what car insurance is right for you, schedule an appointment here.



Homeowners / Rental Insurance

Most people know they need homeowners insurance. Most mortgages even require it so it isn't even a second thought. It is the same with car insurance, you transfer the risk of something happening to your house to the insurance company.


A lot of times the cost of homeowners is a few hundred dollars a year. That is CHEAP compared to having to rebuild a house, even a $50,000 house. If your homeowners insurance was $500 a year, it would take 100 years to equal $50,000. 100 years!


So, buy homeowners insurance. Get enough coverage to rebuild your house. You don't need enough to buy your land again, so if you bought your home (which usually also includes the land under it) for $240,000, you do not need $240,000 in coverage to rebuild your home. You own the land already.

Check on your coverage every year and what it would take to rebuild your house. The cost of building a home keeps increasing over time, so your coverage should follow that trend.


Renters insurance is something that people miss out on. If you are renting a place, YOU NEED RENTERS INSURANCE! It might cost you $200 a year to cover all of your possessions. Get it.


The reason you need renters insurance is because the person you are renting from CAN NOT cover your items. The landlord has homeowners insurance on THEIR property. But they can only insure items they have a financial interest in. They have no financial interest in your items, so can not insure them. Just like you can't insure their home, you have no financial interest in it.


So if something happens to the rental property (water leak, fire, tornado, etc), the landlord will be able to rebuild / fix their house with their insurance. All of your stuff will get replaced with your renters insurance. If you do not have any renters insurance, then your stuff does not get replaced unless you pay out of pocket for it.


You may also need flood insurance and / or earthquake insurance depending on your area. Usually these are required due to locations of your home. Find out before you buy a home if you need one of these. They can potentially increase the insurance cost by a lot each year.


We can help you decide what homeowners / renters insurance is right for you, schedule an appointment here.




Life Insurance

Life insurance isn't for you. Life insurance is for the loved ones in your life that rely upon your income to live. If you do not have anyone that relies on your income, you do not need life insurance at this time. Skip this part if that is you. If, however, someone relies on your income, continue reading.


Life insurance is also something a lot of people do not get often enough. It is again one of those relatively cheap insurances if you are a healthy adult. If you have medical issues, then it can get expensive quick. Another reason to get it in place as soon as possible, you never know what will medically happen to you.


Life insurance is to replace your income in case something happens to you. That way your loved ones will not have to worry about paying the mortgage, paying the bills, getting food on the table, etc.


There are many types of life insurance offered but only one that you should get.


15-20 year TERM life insurance. This is one of the cheapest types and one of the best. It should cost, for a normal healthy human, less than a few hundred dollars a year. All of the other types try to include other products into a one size fits all solution. We all know that when you try to do two things at once, both may get done, but no where near as good as if you just focused on one of those at a time.


Term life insurance is just like the name implies. If you get 15 year term life insurance, you and the insurance company are agreeing to a certain amount of coverage at a certain cost. This cost will remain the same for the 15 year term. So if you get $500,000 15 year term life insurance and it costs you $180 to start. You will pay $180 for the next 14 years (so 15 years total). At year 16, this price changes. Same thing for 20 year, except that price is locked in for 20 years. This does not change even if your health changes. That is why it is good to get this as soon as you need it.


You should ideally have about 10 - 12 times your annual income. So if you make $100,000 a year, you need $1,000,000 to $1,200,000 in term life insurance. The simple reason is that the S&P 500 averages around 10-12% returns. So if your loved ones would take your $1,000,000 life insurance policy and invest it, it should earn about $100,000 a year in interest. They never have to dip into the $1,000,000, they only need to spend the interest it earns. This allows them to live however long they need to as if you were still earning that money. There should never be a time when they don't have it with this setup.


You also don't need accidental death life insurance. Term life insurance covers death. Period. It doesn't matter (normally, but some do have clauses) how you die.


We can help you decide what term life insurance is right for you, schedule an appointment here.


Some other optional insurances that I would suggest are the following:

  • Identity theft protection (that does all of the work for you)

  • Umbrella Policy (if your net worth is over $1,000,000)

  • Long term care insurance (if you are getting close to 60)


Until next time,

Jacob Dunklee

www.AtoZFinancialFreedom.com

AtoZFinancialFreedom@gmail.com

(602)842-1484



Here is another article about these types of insurance by Dave Ramsey: https://www.ramseysolutions.com/insurance/types-insurance-cant-go-without


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