Picking the appropriate level of insurance coverage for your family can be a confusing and overwhelming task.
Not only are there multiple insurance companies to choose from for the various insurance needs you have, but there are so many different types of insurance that it can be difficult to know where to start.
Critical Insurance Policies to Have For Your Family
There are five critical insurance policies every family should have.
The most critical insurance policy for a family is life insurance coverage on both spouses or parents regardless if they are working or not.
You need to have enough insurance not only to cover funeral costs, but to replace your income for a significant period of time. Funeral costs are a one time event that while not insignificant, won’t occur again. The more critical need is to replace the income you would have brought to your family over the coming years.
For most families, having coverage equal to ten times your salary is appropriate. If one spouse earns $50,000 per year, they should have a term life insurance policy for $500,000. If the other spouse earns $35,000 per year, they should have a policy for $350,000.
If one spouse does not work and you have children, it is still a good idea to have a life insurance policy on them simply because by staying at home they are earning a “salary” of the money not spent on childcare. If they are not there to take care of the children, there will be a cost that can drain the family budget.
A very close second to life insurance is disability insurance.
I believe life insurance should come first because it is such a devastating emotional event that can destroy your finances by taking away income.
Likewise, you must be protected from the loss of income due to permanent disability.
Some consider disability insurance more important than life insurance because not only does disability take away future income from you, it also costs money because you’re still a part of the family.
Depending on the severity of the disability you may need special assistance, but at the very least you’re still a mouth to feed. All of that costs money which now must be earned by the one remaining spouse.
Medical, dental, and vision insurance are all very important in the scope of life.
The most critical of these is catastrophic medical insurance. A one week stay in the intensive care unit of a hospital can run well into the millions of dollars. One accident can result in your entire life being ruined just by being in the hospital.
Secondary to that is normal medical coverage to pay for prescriptions and doctor visits.
These two types of policies are often bundled together, but if you don’t have insurance right now you should get a high deductible health plan on your own. HDHPs keep your monthly premium much lower than normal insurance, but require you to spend several thousand dollars out of pocket before insurance kicks in. That $1,000,000 stay in the hospital could be reduced significantly if you had a HDHP plan – you would meet that several thousand dollar deductible almost immediately, then insurance would kick in.
Renters or Homeowners Insurance
Once you’ve covered your life, your potential to have your income taken away through death or disability, and the health of you and your family, the next most important insurance coverage is that of your home.
If you are renting, there’s no excuse not to have renters insurance.
The policy is inexpensive because it doesn’t cover the structure that you live in (that is your landlord’s problem), but just the items you own within.
This means you can get $20,000+ of coverage for less than $20 per month. It is one of those things you never think could happen to you, but if it does you will be kicking yourself for not having paid $240 per year to protect everything you own.
Likewise if you own a home, unless you paid cash for it, you must have homeowners insurance.
Your mortgage company requires it so they aren’t left holding a mortgage on a property that has been destroyed. This insurance covers both the structure, the contents within, and costs you incur for not having use of your home while it is repaired or replaced.
If you drive a car in the United States you need to have automobile insurance.
All states except New Hampshire require you to have at minimum a form of liability insurance coverage that protects you from the liability of running into another vehicle and causing damage. (New Hampshire requires either liability insurance or the financial capabilities to cover the liability yourself.)
Of course unless your car is worthless, you will also want comprehensive and collision insurance as well to protect you if someone else runs into you and damages or destroys your vehicle.
Additional Insurance Options to Consider For Your Family
The above insurance policies will cover the most critical areas of your family’s life. For certain people, additional coverage can be beneficial.
An umbrella policy protects you from excessive liability that your normal insurance policies do not cover.
This policy kicks in after your liability insurance in a certain event is exhausted and you still have liability.
For example, let’s say your automobile insurance has a liability limit of $500,000. You cause a multi-car wreck and then are sued for medical damages worth $1.5 million. Your car insurance would cover only $500,000 of the liability, but you would still have $1 million of liability to worry about on your own. Unless you have that much cash sitting around, you’ll need insurance. An umbrella policy of $2 million in coverage would kick in after the first $500,000 from your car insurance and cover the remaining liability.
Extra Valuables Coverage or Riders
Your homeowners or renters insurance will have limits as to how much of your belongings are covered.
If you have valuables like heirloom jewelry or expensive electronics to cover, an additional rider on your policy will cover those items at minimal cost. If you don’t have the option to add this rider on your current insurance, you can buy a separate policy.
Nothing can be worse in life than needing to pay for an expensive life saving surgery for your best friend Fido, but not having the cash to afford the insurance.
Pet insurance is somewhat controversial – some believe it is an unnecessary expense that doesn’t offer adequate coverage – but if you’re in that type of situation you will be glad you had it. Just make sure to read the policy carefully.
Long Term Care Insurance
As you age you will want to consider long term care insurance.
The earlier you begin paying into the LTC plan, the lower your premiums are.
This insurance helps offset the cost of things like home assistance, hospice care, and assisted living. With healthcare insurance values rising and the final years of your life likely to cost hundreds of thousands of dollar, this type of coverage may become critical in the future.
Final Thoughts on Insurance Coverage
It can be easy to think you are over-insuring your life.
Does everyone need life, disability, health, dental, vision, car, umbrella, valuables, and pet insurance?
It depends on your specific situation. But most people need the first five policies (unless you don’t drive a vehicle) at a minimum.
When you’re looking at insurance polices be sure to have a clear understanding of what is and isn’t covered, and what your out-of-pocket costs will be in certain situations. Remember to shop around to find the lowest rate from reputable companies.