We can’t prevent the unexpected from happening, but sometimes we can protect ourselves and our families from the worst of the financial fallout. Many types of insurance are available, but nobody wants to spend more than they really need to.
Selecting the right type and amount of insurance must always be based on your specific situation. Factors such as children, age, lifestyle, and employment benefits play a role.
Nevertheless, there are four types of insurance that most financial experts recommend everybody have: life, health, auto, and long-term disability.
4 Types Of Insurance Everyone Needs
1. Life Insurance
Life insurance provides for your family if you unexpectedly die. This is especially important if your family is dependent on your salary.
Industry experts suggest a policy that pays out 10 times your yearly income.1 But not everyone can afford the cost. When estimating the amount of life insurance you need, factor in funeral expenses. Then calculate your family’s daily living expenses. These may include mortgage payments, outstanding loans, credit card debt, taxes, child care, and future college costs.
Don’t forget to consider any other sources of family income. According to a 2021 study by LIMRA, formerly known as the Life Insurance and Market Research Association, more than half of U.S. households rely on dual incomes. The study also found that a quarter of families would experience financial hardship within one month of a wage earner’s death.2
- Whole life can be used as an income tool as well as an insurance instrument. As long as you continue to pay the monthly premiums, your whole life policy covers you until you die.
- Term life covers you for a set amount of time.
There are other considerable differences between the two types of insurance, so you may want to seek the advice of a financial expert before you decide which is best for you. Factors to consider include your age, occupation, and number of dependent children.
2. Health Insurance
Only about 9.2% of the American population had no health insurance coverage in 2021, the Centers for Disease Control (CDC) reports in its National Center for Health Statistics. More than 60% got their coverage through an employer or in the private insurance marketplace while the rest were covered by government-subsidized programs including Medicare and Medicaid, veterans’ benefits programs, and the federal marketplace commonly known as Obamacare.3
Having medical insurance means that you have no reason to avoid an annual wellness visit or a doctor’s visit for an occasional ailment. And you won’t get stuck with a massive bill if you or a member of your family have an accident or develop a chronic disease.
If you’re on a very tight budget, even a minimal policy is better than none. If your income is low, you may be one of the 80 million Americans who are eligible for Medicaid.4 If your income is moderate but doesn’t stretch to insurance coverage, you may be eligible for subsidized coverage under the federal Affordable Care Act.
The best and least expensive option for salaried employees is usually participating in your employer’s insurance program, if your employer has one. The average annual premium cost to the employee in an employer-sponsored health care program was $7,739 for single coverage and $22,221 for a family plan in 2021, according to research published by the Kaiser Family Foundation.5
3. Long-Term Disability Coverage
Long-term disability insurance is the one type of insurance most of us think we will never need. Yet, according to statistics from the Social Security Administration, one in four workers entering the workforce will become disabled and will be unable to work before they reach the age of retirement.6
Often, even workers who have great health insurance, a nice nest egg, and a good life insurance policy don’t prepare for the day when they might not be able to work for weeks, months, or ever again. While health insurance pays for hospitalization and medical bills, you’re still left with all of the expenses that your paycheck had covered.
Many employers offer both short- and long-term disability insurance as part of their benefits package. This would be the best option for securing affordable disability coverage.
If your employer doesn’t offer long-term coverage, here are some things to consider before purchasing insurance on your own:
- A policy that guarantees income replacement is optimal. Many policies pay 40% to 70% of your income.
- The cost of disability insurance is based on many factors, including age, lifestyle, and health. The average cost is 1% to 3% of your annual salary.7
- Before you buy, read the fine print. Many plans require a three-month waiting period before the coverage kicks in, provide a maximum of three years’ worth of coverage, and have significant policy exclusions.
4. Auto Insurance
Despite years of improvements in auto safety, an estimated 31,720 people died in traffic accidents on U.S. roads and highways in the first nine months of 2021, according to the National Highway Traffic Safety Administration.8
Almost all states require drivers to have auto insurance, and the few that don’t still hold drivers financially responsible for any damage or injuries they cause.9
Auto insurance will cover the expenses and help guard you against any litigation that might result from the accident. It also protects your vehicle against theft, vandalism, or a natural disaster like a hurricane.
As with all insurance, your individual circumstances will determine the cost. Compare several rate quotes and the coverage provided, and check periodically to see if you qualify for a lower rate based on your age, driving record, or the area where you live.
The Bottom Line
Most experts agree that life, health, long-term disability, and auto insurance are the four types of insurance you must have. Always check with your employer first. Employer coverage is often the best option.
For your other insurance needs, obtain quotes from several providers. Some provide discounts if you purchase more than one type of coverage.
If you are unable to afford private health care insurance, check to see whether you are eligible for subsidized insurance under the Affordable Care Act.