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Another insurance article. I’m so sorry. But not really. Insurance is not nearly as much fun to talk about as making money in the stock market or optimizing finances, but it is still very important. What is worse than making a ton of money, only to lose it by not being properly protected? Read below to learn exactly which type of insurance you need by age.
Insurance Needed in Your 20’s
I previously talked about car insurance in depth, so check out that information.
Health insurance is now mandated by law. Otherwise, the individual is responsible to pay a penalty when they file their taxes. According to eHealth, insurance premiums for individuals are $4,000 a year, while family plans cost a little over $7,000 a year. This is expensive, but health insurance is not only vital to your health but also to your finances.
A Harvard Study showed that 62% of bankruptcies are due to medical expenses. The more interesting part was that 72% of those that filed for bankruptcy had some sort of health insurance. What that says to me is that individuals are not getting enough insurance to cover themselves when a medical emergency happens. I encourage you to re-examine your insurance every year to ensure that your health coverage is correct for you.
Renters insurance covers a tenant’s lost or damaged possessions as a result of fire, theft or vandalism. It also covers a tenant’s liability in the event that a visitor is injured on the property. Renters insurance can also provide compensation for alternative living arrangements in the event that your rental unit or rented home becomes uninhabitable due to events such as storm damage or an apartment fire.
So why would you actually need rental insurance? Well, as a renter, if your possessions are ruined in a fire, you are not covered by your landlord’s insurance policy. Let me repeat that. Your landlord is not responsible for the contents inside the home if the home becomes damaged. The landlord’s homeowner policy will cover to replace the existing dwelling but unfortunately not the renter’s contents.
Therefore, if you have anything valuable and you don’t have renter’s insurance, you as the renter would be out of luck. Keep in mind though, renter’s insurance normally does not cover flood damage or earthquakes. Otherwise, it covers pretty much everything else.
So how expensive is renter’s insurance? It’s normally pretty affordable. You can receive roughly $30,000 of personal property coverage and $100,000 of liability insurance between $150-$300 a year. This means that it would cost roughly $15-$25 a month to insure your property.
Long-Term Disability Insurance
Long-term disability is something most of us don’t like to think about. However, according to Social Security Administration records, three out of ten workers will become disabled before they reach the age of retirement. Further digging into the stats, it appears that 90% of people on disability are due to accidents or sickness OUTSIDE of work.
Long-term disability is not that expensive averaging in cost of $250 a year, or roughly $5 a week. For some of us, that means skipping Starbucks once a week to ensure that we are covered.
Insurance Needed in Your 30’s
If you own a home, I’d venture to guess 99% of homes have home insurance. Why? It’s because when the bank lends money through a mortgage to a homeowner, they require that the homeowner buy insurance to protect the bank’s loan. Remember, you may think you own the home, but until you make that final mortgage payment, the bank really owns it.
Homeowners insurance typically covers damage caused by perils such as fire, windstorms, hail, lightning, theft or vandalism. However, it normally does not include floods and earthquakes.
Dwelling coverage pays to repair or rebuild your house, including electrical, plumbing, and heating and air conditioning costs.
Other Structures Coverage
This covers damages to detached structures such as garages, sheds, fences and even cottages on your property.
Personal Property Coverage
This reimburses you for the personal items in your home that may be damaged or destroyed, which could include your televisions, laptops, electronics, furniture, clothes and even athletic equipment.
Loss of Use Coverage
This pays additional housing and living expenses if you must move out of your home temporarily while it’s being restored.
This helps protect your assets and cover your defense costs in the event of a lawsuit because you or your family members are responsible for causing injuries or damage to other people or their property.
While insurance rates varies by state, on average it costs roughly $950 a year for an average home worth $188,000 in the U.S. You can expect to pay more if you are in areas that experience harsh weather conditions, or if your home is more expensive than the average home to insure.
This policy is normally bundled with either your homeowner insurance and/or car insurance and costs a negligible amount. Umbrella insurance is used when you have exhausted your homeowners and car insurance. It provides additional insurance in case the claims go beyond your current insurance limits.
Umbrella insurance is also not that expensive when you think about it. Normally, umbrella insurance costs between $20-$30 a month for $1 million to $2 million in coverage. This is a fantastic deal if you live in a city where you are surrounded by expensive vehicles and are in need of additional protection if you exhaust all your car insurance.
Keep in mind when trying to obtain umbrella insurance that many insurance companies require that you have a certain level of coverage on your home and car before you can qualify. This means that you can’t have $20,000 of property damage and expect the umbrella policy to cover the rest. Often times, insurance companies require that you have $300,000 or more in coverage before they will consider offering umbrella insurance.
Whole Life VS. Term Life Insurance
One thing that I can’t stand is the conversation of whether to have whole life or term life insurance. This is where I believe some brokers really try to confuse people. In my opinion, the only correct choice between the two is term life insurance.
Term life insurance encompasses a certain amount of time to cover a certain amount of expenses. For instance, let’s say you have fifteen years left on your mortgage. Once you pay off your mortgage, you will no longer have any debt. There is no need to carry life insurance past this if you have adequately saved for the future. In this case, you would need to buy a fifteen-year term life insurance policy.
Whole life insurance can be painted as a great investment over time with huge monthly premiums. The pitch may sounds nice, but it’s so false. Insurance should not be an investment.
Example of Both Types
Let me explain in further detail. On average, whole life insurance is ten times as expensive term insurance from the research that I’ve done. This means that if a whole life insurance policy costs $1,200 a year for a healthy 25-year-old, a term life insurance policy will in turn cost $120 a year. Now here’s the difference between the two policies. The term life insurance is fixed over a number of years. For this example, let’s say it’s a 15 year fixed policy. Now let’s say that the whole life policy is worth $250,000. The insurance brokers would probably say the whole life policy is a great deal. You pay $1,100 extra dollars every year for the rest of your life and your family will get $250,000 when you pass away.
Now let’s do some quick math . Let’s make the assumption you are a healthy individual and will live until the age of 75. So let’s say you decide instead of buying a whole life insurance policy, you decide to invest the difference of $1,100 into the S&P 500 which on average has returned 8%. When you pass away at age 75, your family would have a whopping $648,000. Almost a $400,000 difference when you compare the numbers. As you can see, term life insurance is a much wiser option.
Insurance Needed in Your 50’s
Long-Term Care Insurance
According to the U.S. Department of Health & Human Services, seven out of ten Americans turning 65 will need some form of long-term care in their lifetime. The current costs for an in-home aide is $46,000, and the cost of a private room at a nursing home is over $92,000 according to Genworth Financial. The shocking thing is that only eight million people currently have long-term care, while there are roughly 70 million baby boomers that may need some sort of long-term care in the upcoming years.
Much of this is due to the sticker shock many baby boomers receive when inquiring the cost of long-term care. Long-term care for a couple in their 50’s may cost over $3,000 a year and may shoot up in the future for any reason. Additionally, the longer that the couple waits, the more the insurance will potentially cost in the future.
One thing to remember, Medicare and other types of insurance do not always cover long-term care as it is not considered a medical expense, so you will need to check with your provider before making these types of decisions.
In the research that I’ve done, these appear to be the most important insurance coverages to consider. If I’ve missed any other critical insurance coverages, please let me know. And, as always, feel free to share your thoughts below.