What Kind of Insurance Do I Need?

Having appropriate insurance is an important part of financial well-being, but one that is often overlooked. Financial well-being is all about using your available financial tools and resources to make decisions that make you feel confident and secure about your finances.

And nothing contributes to peace of mind better than proper insurance protection. Insurance is something that you might not feel the need for – until you really need it.

Your insurance needs can be a tough call. Certain types of insurance are mandated by law (like liability insurance if you drive a car). Other types are mandated in order to get a loan (such as homeowner’s insurance if you have a mortgage). And other types are completely up to you, like life insurance.

Some people don’t have enough coverage to protect them in the event of an emergency, while many others are paying too much for the coverage they have. Striking a balance between the two is a great goal. Here’s some considerations that will help you find appropriate coverage:

How much car insurance do I need?

For car insurance make sure you have at least what is mandated by the state where you live. Then consider how ready you would be to handle the expenses of being hit by another driver. Most insurance won’t cover a rental car while your car is being repaired, so consider whether you’re prepared to cover your transportation needs, or whether it’s worth paying extra for this type of additional coverage.

Additionally, you should consider UIM coverage (for uninsured or underinsured motorists) – this coverage kicks in if another driver is at fault who has no insurance or minimal insurance. Your insurance agent should be able to explain the various additional coverages above and beyond what’s required by the law.

Do I need life insurance? How much?

Where life insurance is concerned, there’s a lot of things to think about. First, you should decide how long you need coverage, which should be dictated by your financial goals and your desires for your family. Life insurance is designed to either last a certain period of time (called “term life”) or for a lifetime (called “whole life” or “universal life”). You may decide you only need insurance for a certain period of time, such as while your kids are growing up, or while you have a mortgage – in that case, you should probably get term life insurance.

On the other hand, if you want the insurance to cover things like your burial expenses or to replace your lost income to support your spouse, then consider lifetime insurance.

Once you’ve figured out what kind of insurance to get, calculate how much life insurance coverage you need. A straightforward way to do this is by determining the four common costs people want to cover with their insurance, known as the “DIME” method. DIME stands for:

• D – Debt (This includes credit cards, mortgage, student loans, car loans, etc.)
• I – Income (How much of your income will need to be replaced based on the needs of your spouse and anyone else who depends on your income? Do you want to replace your income for the rest of their lives?)
• M – Mortality (What are your burial wishes and how much will those cost?)
• E – Education (Do you have young kids that have childcare expenses? Do you want to help fund the education costs of your kids or other dependents?)

You’ll also need to consider your other financial goals. Some whole life insurance policies can also be used as savings, and most have a cash value that’s meant to increase over time. These policies also have a death benefit (or face amount), which is the amount that will be paid out at the time of death. It’s a good idea to look at the ways you can use life insurance as part of your total financial portfolio.

How to decide on types of health insurance

For your health insurance, consider whether a high deductible or low deductible plan makes sense. If you take the highest deductible plan available to you, you could make up the difference with an emergency fund that is large enough to cover that deductible – this may be ideal if you seldom use your health coverage because you’ll benefit from the lower premiums.

If you take a low deductible plan on the other hand, this typically means that when you get sick, you pay less money up front before your plan starts paying. The common trade off is that you’ll pay more for your monthly premium when you have low deductible coverage. This type of plan may be ideal if you have a chronic health condition requiring frequent care, or if you have children.

If you have a health plan offered through your workplace, talk to your benefits administrator, who should help you decide what plan to take. If you don’t have health insurance offered through your workplace or other similar provider, talk directly with the health insurance company – they should help you decide which type of plan is best for you.