Are You Covered?

Insurance is a form of protection for the things you value most in life. It helps you manage risk by promising to assume some or all of the financial burden caused by unexpected events such as fire, accidents, illness, or death. But not everyone has the same insurance needs. As you accumulate more of value in your life — a car, a home, a child — there’s more you need or want to protect.

Anything can be insured against anything, for a price — the premium, set by the insurer, is based on the chances that you’ll ever need to file a claim. There are some forms of insurance that we are required to have by law, such as auto insurance which is required in nearly all 50 states. There are other forms of insurance that we are sometimes required to have by contract, such as homeowner’s insurance if we have a mortgage –even though it’s a good idea to have it regardless of whether it’s required. And there are forms of insurance that we choose to buy so we can provide for our loved ones if we die or sustain an injury, such as life or disability insurance.

The key to making good decisions is knowing and understanding your options. When it comes to insurance, that begins with learning what types of insurance are available and what they protect against. What follows is an introduction to the insurance buying process that should get you thinking about what of yours want to protect. We’ll also touch on the potential consequences of not having one or more of these essential types of insurance.

Life Insurance

Most people don’t like to think about, much less talk about, the one thing we all have in common: that we’re all going to die. The one immutable fact of life is that no one gets out alive. The question none of us knows the answer to is, “When?” The inevitability of death is what makes life insurance unique among all of the essential types of insurance: It is the only one guaranteed to have a claim eventually.

Another important fact about death is that it is expensive. According to the National Funeral Directors Association, the median cost of a funeral is over $7,000. That cost increases every year, and whether you die unexpectedly at a young age or quietly in your sleep at 107, someone other than you is going to have to pay for your final expenses. At the very least, life insurance can be used to cover those costs, lifting the financial burden from those left behind.

However, depending on your life circumstances, your passing may result in the need for far more money than just funeral expenses. Would you be leaving behind years of mortgage payments? Credit card debt or student loans? Children who depend on you?

The more personal relationships you have, the greater your need to provide for others after you are gone. For example, if you’re single and no one is dependent on you for support in any way, then your need for life insurance is minimal — though you may not wish to stick your grieving parents with your credit card debt. If you’re married, the life you’ve built with your spouse is based on both of you — which means that if you die suddenly, you will leave behind not just an emotional hole but a financial one as well.

As your financial responsibilities and obligations increase, so does the need to replace your financial contribution when you’re gone. Dependent children, parents, and sometimes younger siblings that rely on you for support can be left without resources in the event of your untimely demise. Essentially, the more stuff you have, the more life insurance you may need. Check out Karla Lant’s outstanding Complete Guide to Life Insurance for a more detailed look at life insurance.

Car and Motorcycle Insurance

Motor vehicle liability insurance covers injuries and damages to people and property other than you. It is required in 49 of 50 states and Washington, D.C. If you own and operate a car, truck or motorcycle you are required by your state’s laws to meet certain minimum requirements for insurance. The only state that does not have that requirement is New Hampshire, which allows owners to self-insure by providing proof of financial responsibility. Motorcycles are exempted from liability insurance in Washington, D.C., Montana, Florida, and Washington state.

Since auto insurance minimum requirements are determined by each state’s department of insurance, the limits vary. Vehicle liability insurance has three limits that cover property damage and bodily injury.

Those limits are expressed in the form of three numbers, in thousands of dollars — for example, 25/50/25. The first number is the total your insurance will pay if one person (not you) is injured in an accident that is all or partly your fault. The second number is the maximum that will be paid for injuries to multiple people. The final number is the limit that will be paid out for property damage, which includes other cars, buildings, and other things that are damaged.

Satisfying state minimum requirements for car insurance may be enough to keep you out of trouble with the law, but it’s not always enough for your needs. This is especially true for required liability coverage, which in some states can be as low as 15/30/10. That means if you do serious damage to someone’s new $30,000 car, you could be on the hook for $20,000 or more that you will have to pay out of pocket. And we all know, unfortunately, how quickly medical bills can skyrocket; $15,000 may not even cover the other driver’s ER visit.

When it comes to car insurance, there’s a lot more to covering your assets than just meeting state minimum requirements. A good primer on how it works can be found in Jeff Rieger’s Guide to Car Insurance and When Collision Coverage Is Worth It.

Homeowners Insurance

In Randy Wood’s Complete Guide to Home Insurance, he talks about the dual view many people have of homeowners insurance: It’s a necessary evil, and an important source of peace of mind.

A home is the single biggest investment many of us will ever make, and as such we have a strong desire to protect our investment. There’s your peace of mind.

The necessity of homeowners insurance comes from the banks that finance our homes and have a stake in protecting their investment. Mortgage providers will generally require certain types and amounts of insurance as a means of guaranteeing that if tragedy strikes they are protected.

Because our homes are unique — and extensions of ourselves — homeowners insurance is probably the most customizable of all the essential types of insurance. Even two structures that are identical in size and construction may have different insurance needs, because a large part of what a homeowners policy covers is the contents of the home. Homeowners insurance also provides a backstop for damages that can occur when someone is injured in our home or the property surrounding it.

Understanding homeowners insurance includes learning not only what is covered, but what is not covered. Homeowners policies are unique in the insurance world because protection that seems to be granted in one part of the policy may be limited or excluded in another.

Renters Insurance

Not all essential insurance is required, and renters insurance is a good example. Even if you don’t own the place where you live, it’s still your home and the place you keep most of your stuff. Protecting it falls to renter’s insurance.

Many people mistakenly believe that because their landlord has insurance, they’re protected under that policy — but they’re not. The easiest way to understand what is covered by your landlord’s insurance and what is not is to think of your rental as a box. Your landlord is responsible for the box: the four walls, ceiling, and floor, as well as anything that is attached to them such as plumbing fixtures. Everything else that’s inside the box is yours and your responsibility.

If a thief kicks in your front door while you’re at work, your landlord will pay for a new front door, but not your stolen belongings — that job falls to renters insurance. If a leak develops in your roof, your landlord is responsible for fixing the hole — but that’s it. If the rain that came in destroyed your 70-inch flat-screen TV and $3,000 sofa, you’d need renters insurance to cover it.

Renters insurance can be a very low-cost way of ensuring that you are protected against the unexpected. In Renter’s Insurance: Why It’s Worth It, Randy Wood walks you through the basics of what renters insurance protects against and how it works.

Flood Insurance

Regardless of whether you own or rent, have homeowners insurance or a renter’s policy, chances are you are not protected against flood damage.

Flooding happens far more often than the few major events that are reported on the evening news. Floods can also be highly focused events that affect a single town, neighborhood, or even a single home. Flood damage can be the result of runoff, ground water, tidal surges, or even broken water and sewer mains outside of your home.

You can determine the flood risk from natural causes by visiting the website floodsmart.gov where you can also find a rate for federal flood insurance. Since private insurance companies almost never provide flood coverage, the only place to secure insurance is from the federal government. The rates are based on your home’s location and its value. The Simple Dollar’s Homeowner’s Flood Insurance Guide provides detailed information about how this inexpensive and essential insurance works.

Health Insurance

Health insurance is one of the most essential types of insurance — in fact, health insurance is now mandatory for all Americans and there are tax penalties for not having it. For decades, the leading cause of personal bankruptcy in the United States has been medical expenses. A 2009 Harvard University study found that about 45,000 people died annually due to a lack of insurance, placing it in the top 10 causes of death in the United States.

If you view your health in the same way you view a physical asset, you will quickly discover that it is more precious than gold and impossible to replace with a substitute. All of our other possessions pale in comparison with the importance of our health, and protecting it requires that we seek care when needed. The purpose of health insurance is to alleviate the burden of cost as a consideration when you need medical care.

Health insurance can be complicated, and the ability to choose the best plan for yourself and your family requires that you first master the basics. Jennifer McCarthy’s Complete Guide to Health Insurance is an outstanding place to begin.

Disability Insurance

When people become unable to work due to illness or injury, the second thing that crosses their minds is: How am I going to live without any income?

Rent or mortgage payments, along with utility bills and other expenses, continue to pile up — regardless of your ability to pay them. Making matters worse is that your expenses will probably increase while you are disabled. In some cases, accumulated sick and vacation pay can ease the burden for a short time — but once they’re exhausted, you’re on your own.

Disability insurance provides a measure of financial security by providing you with regular payments while you are unable to work. Because the payments are made directly to you, they can be used for whatever purposes you need, such as paying bills.

Disability insurance does not provide for permanent income replacement and may not cover all of your expenses, but it should be considered an essential form of insurance for anyone who does not have vast stores of savings or income from sources other than work. To learn more about it, read Disability Insurance: Understanding Your Options.

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