Ultimate Guide to Insurance - Types of Insurance You Need and When

Insurance might not be the most exciting topic you read about today. Nevertheless, learning about the types of insurance you need and when is essential to securing your future and safeguarding your legacy.

This guide will help shed light on the different types of insurance so you can make the right choices for you, your business, and your family.

What is insurance?

Insurance helps us manage risk and protects us from unexpected financial losses in various scenarios. Here are the types of insurance we'll cover today:

• Health insurance

• Car insurance

• Homeowners insurance

• Umbrella insurance

• Renter's insurance

• Life insurance

• Disability insurance

• Long-term care insurance

• Pet insurance

• Business insurance

Apart from the financial benefits of insurance, it provides you with peace of mind. Maybe you're worried about providing for your family when you pass away or how to afford your mortgage if you become disabled and can no longer work. Whatever it is that keeps you up at night — there is likely an insurance solution for you.

Types of insurance and when you need it

Health insurance

When you need it: Always

Health insurance is one of the few insurance policies you should always have. The unfortunate reality is that most people can't afford the costs of medical care out of pocket — which is why medical debt is the #1 cause of bankruptcy in the United States.

It doesn't help that the world of health insurance is notoriously complex, making it challenging for people to choose the proper coverage. Most Americans have access to health insurance through their jobs — known as group health plans. However, many people don't have access to health insurance through an employer and instead purchase individual plans through state marketplaces.

Car insurance

When you need it: For as long as you own a car

Car insurance is one of the few types of insurance required by law — although the specific rules and minimum coverage requirements vary by state. Car insurance helps protect you and others in the event of an accident.

How much car insurance you need also depends on whether you own your car outright or have a car loan. Some lenders require you to carry collision and comprehensive coverage as a condition of loan approval.

Homeowners insurance

When you need it: When you become a homeowner

Your home is likely one of the most significant investments you will make in your lifetime. Therefore, it's only natural to want to protect your property and everything in it, including your furniture and personal belongings.

Homeowners insurance is highly customizable, with many optional riders to suit your specific needs. For example, maybe you have valuable artwork or jewelry you want to insure. Many people purchase additional coverage for their engagement or wedding rings. If you own something of value that would be expensive to replace on your own, there is likely an insurance rider you can purchase.

Umbrella insurance

When you need it: When your net worth exceeds the liability limits on your homeowners and auto insurance

Umbrella insurance is a type of optional personal liability coverage that is typically an add-on to your homeowners or auto policy — although individual policies are also available. An umbrella insurance policy helps cover claims over and above the liability limits on your home or auto policies.

For example, let's say your dog attacks someone visiting your home, and they sue you for medical expenses, lost wages, and emotional distress. If the amount you owe exceeds the liability limits on your home and auto policies, your umbrella policy kicks in to cover the gap.

Or let's say you're in a car accident and owe $50k in damages to the other driver. You wanted to save money, so you purchased the minimum auto liability coverage of $25k. Your auto policy will cover the first $25k, but you're still on the hook for the other half. However, if you have umbrella coverage on your auto policy, it will kick in to cover the rest.

Renters insurance

When you need it: If you rent your home

If you thought you'd be able to dodge paying insurance as a renter, you'd be wrong. A common misconception is that your landlord carries insurance on your behalf, so you don't have to. However, your landlord's insurance policy only covers the cost of replacing the actual building, structures, and whatever else they choose to insure, such as appliances. There is nothing in their policy to help you replace your personal belongings if something happens to the home.

Life insurance

When you need it: When someone is financially dependent on you (i.e., spouse, children, or elderly parent)

One of the most important types of insurance is life insurance. Life insurance provides a cash amount (called a death benefit) to your loved ones when you pass away. This money can help replace your lost income and allow your family to maintain their current lifestyle.

You might be wondering how much life insurance you should purchase. According to a recent study from the National Association of Insurance Commissioners (NAIC), 54% of the people surveyed said they feel uncertain that their life insurance coverage is sufficient.

A common approach to calculating life insurance is a needs-based analysis. This involves considering the expenses that need to be covered by your death benefit — which may include paying off outstanding debts and the costs of sending your children to college.

For many people, a simple term life policy is all you need. When you purchase term life insurance, your family receives a death benefit if you pass away during the coverage period, typically 10, 20, or 30-year terms.

Disability insurance

When you need it: If you rely on employment income to survive

If you rely on employment income to pay your bills and maintain your lifestyle, you need disability insurance. Disability insurance helps manage the risk if a disability impacts your ability to work — which is why it's sometimes referred to as "disability income insurance." Disability insurance usually only replaces a portion of your income (60-80% is standard).

There are two main types of disability insurance: long-term and short-term disability.

●      Long-term disability: Benefits vary but are usually between 5 and 10 years.

●      Short-term disability: Replaces a percentage of your lost income for 3-6 months.

Most disability insurance policies have a waiting period — which is why building up your emergency fund is essential to help cover expenses until your benefits kick in.

Long-term care insurance

When you need it: Your late 50s to early 60s is a good time to purchase long-term care insurance (provided you're still in good health).

According to the Administration for Community Living (part of the U.S. Department of Health & Human Services), an individual aged 65 or older has a 70% chance of needing long-term care support during their lifetime. That’s where long-term care insurance comes in.

Long-term care insurance helps cover assisted living and nursing home costs. With the rising costs of elder care in the U.S., long-term care insurance is becoming more popular. Unfortunately, long-term care expenses are typically not covered by standard insurance or Medicare plans.

Pet insurance

When you need it: When you bring a puppy home

If you're a pet parent that would have trouble affording veterinary care if your pet were to become sick, you should consider a pet insurance policy. Keep in mind pet insurance isn't designed to cover the costs of routine preventative care such as annual check-ups. The real value of pet insurance is if your pet becomes severely ill and needs ongoing treatment or surgical procedures.

If you don't want to face the heartbreaking choice of giving up your pet or putting them down because you can't afford the costs of veterinary care, consider pet insurance. Pet insurance policies can vary in quality, so be sure to shop around for the most reputable companies and read the fine print.

Many pet insurances don't cover preexisting conditions, which is why these policies are most valuable if you purchase when your dog is still a puppy. An alternative to pet insurance is to have an emergency fund (separate from your main one) just for your pet.

Business insurance

When you need it: When you start a business

If you are a business owner, you will need business insurance to help protect you from financial losses resulting from normal business activities. There are several types of business insurance, but the most common are general liability and commercial property insurance.

• General liability: General liability coverage helps protect your business from claims resulting from property damage or bodily injury to another person.

• Commercial property insurance: Commercial property insurance will help cover the costs of replacing your building, equipment, inventory, or personal belongings.

Final thoughts

Not having the proper insurance can lead to disastrous financial consequences. It's crucial to take stock of your risks in life and business and take steps to manage these threats with the right insurance policies. Remember, as daunting as it is, insurance plays an important part in the overall strategy to help protect your love ones.

Next steps

If you're still unsure which insurance you need and how much coverage is sufficient to manage your risks, it might be time to contact a professional.

Start building a brighter financial future today!