By Geoff Williams
There isn't a lot of talk about insurance in school. So when we become adults, we're left to consider the dizzying array of insurance policies on our own and wonder if we need all of them, just some, or none of them. It's almost as confusing as learning the Pythagorean theorem and the periodic table of elements.
So if you're new to the world of insurance or you could use a brush-up tutorial, here is a somewhat subjective list of the types of insurance you absolutely need, types you may want and those you definitely don't want to buy.
Insurance You Need
Homeowners insurance. If you own a house, your bank will require you to have homeowners insurance. In fact, "if someone loses their homeowners insurance for some reason – cancellation, nonpayment, nonrenewal, then the bank is notified," says Dan Weedin, an insurance consultant in Seattle. "They will immediately place their own insurance in it and bill the homeowner. Then they will give the homeowner a chance to get their own. The bank will not allow it to go uninsured for any length of time."
Unless you've paid off your mortgage, there's really no way out of homeowners insurance.
Auto insurance. This is another must-have. In fact, it's against the law to drive without some sort of coverage. If you're caught driving without insurance, you probably won't go to jail, but your driver's license will likely be suspended and you'll be fined.
Health insurance. If you are 25 or younger, you don't need to buy health insurance, assuming you're still covered on your parents' policy. But otherwise, add it to your list. According to Healthcare.gov, in 2014, if you don't have health insurance, you'll have to pay whichever is higher: either 1 percent of your yearly household income or $95 per uninsured adult ($47.50 per child under 18). In 2015, the fee will be 2 percent of your income or $325 per person, and in 2016, it'll be 2.5 percent of your income or $695 per person. In 2017 and beyond, the fee will be adjusted for inflation.
Insurance You May Need
Disability insurance. Regi Armstrong, president of Armstrong Wealth Management Group in Florence, South Carolina, casts his vote for disability insurance as something everyone should consider getting. "Disability insurance replaces one's income if we become incapacitated during our working years," he says. "It's very important when only one person in the household has an income or one has a much larger income than their spouse."
Life insurance. Generally, people buy a life insurance policy after they're married or have a child. As Laura Adams, a senior analyst at InsuranceQuotes.com, says, "It's critical when your death would create a financial hardship for those you leave behind."
Adams also points out that there may be some unmarried, childless people who should get life insurance. "For instance, if you cosigned a car loan, student loan or credit card with a family member or friend, they would be responsible for the entire debt if you died," she says.
Umbrella insurance. Think of this as insurance for your insurance. "It's an extra amount of liability coverage in $1 million increments that protects over and above your personal and auto liabilities if they become exhausted," says Weedin, who thinks middle-class individuals and families and those in the upper middle class and higher should consider umbrella insurance. "Generally, a family can add this policy for between $250 to $300 a year," he adds.
Whether you need umbrella insurance depends on what you have to lose and how concerned you are about getting hit with a lawsuit. After all, even if you aren't worth millions, somebody could sue you as if you were. That worry is why umbrella insurance exists. "It's very important for those who might be the targets of lawsuits, like physicians and business owners," Armstrong says.
Insurance You Don't Need
Credit card insurance. In general, stay away from any type of coverage that would pay off a credit account, whether it's a credit card, mortgage or car loan, Adams says. "You can get this coverage by having enough regular disability or life insurance and avoid this duplicate coverage," she says.
Credit card fraud insurance. People who worry about credit card theft and are fearful that they'll be on the hook for thousands of dollars of fraudulent purchases tend to purchase this. But the odds that you'd have to pay in this scenario are virtually nonexistent. "It's typically overkill," Adams says. "Your maximum liability is limited to $50." This applies to all credit cards.
Life insurance for a child. Some people buy these policies in case the unthinkable happens to their child, figuring at least there will be money for a funeral. But your child would be far better off if you had a brighter outlook and put that money into a college savings account.
Look at it this way: Insurance exists to help you replace or recover what you've lost. The more expensive that loss is, the more likely you need insurance. That's why homeowners, auto, health and life insurance are so important, and things like an extended warranty on an appliance are a waste of money.
But life insurance for the loss of a child? No insurance policy will help you recover from that.