Human psychology makes no sense sometimes. We buy high and sell low, act against our economic best interest, and insure things that we can afford to lose while we fail to insure the most important assets. Think about it: Are you more afraid of your computer crashing or of becoming disabled for the rest of your life?
Insurance Is All About Understanding Risks
The key is to think out how much risk you can take on. If something goes wrong (like you wind up in the hospital) and the potential downside is $300,000, decide if buying insurance is worthwhile—you’d be spending a little money now to manage a big risk. Similarly, you could insure your computer, but if you have the money to replace it when it breaks or is stolen, then you might choose not to insure it, which is essentially self-insuring. Not getting insurance is still a choice; you’re making the choice that, if something bad happens, you’ll pay for it with your own money.
It’s often tricky to navigate which kinds of insurance you do and don’t need. So, we break it down with some simple rules of thumb:
We break down what each kind of insurance does and things to note:
This covers you if you become sick or injured. Read our health insurance basics to learn more.
This insurance will replace your income if you become disabled and can’t work. There are short and long term policies available—note the distinction of “own-occupation” coverage, which states that you will receive insurance money if you are too disabled to perform your job. Otherwise, imagine a business executive who gets injured but is told that she won’t receive disability insurance because, even though she can’t work at her old job, she could still work in the fast food industry…
Renter’s or Homeowner’s Insurance
This will cover you, for example, if your apartment floods and all your stuff is ruined. While your landlord will be responsible for the structure itself, renter’s insurance will give you somewhere to stay in the meantime and replace belongings that you’ve lost. Sometimes, acts of God or certain kinds of flood or fire damages aren’t covered. Understand what is and isn’t covered under your plan. We know that the thick packet you receive is long and complicated, but make sure that you at least read the outline of it, generally the first couple pages. If you don’t understand it fully, get someone to help you. If you live in an area that’s known for flooding or fires, find out if there are holes in your current policy.
Riders for Additional Property
Coverage for items like jewelry or electronics will normally be included in a rider to your homeowner’s or renter’s insurance policy.
This is non-negotiable. For more info on your options, check out our auto insurance basics.
Life insurance will provide money to your loved ones when you die, so that those who depend on your income aren’t left in a bad situation. If you’re considering life insurance to avoid giving debt to your loved ones when you pass away, note that this only applies if your loved ones have cosigned for those loans.
Long Term Care Insurance
Long term care insurance will cover the costs if you or a loved one becomes incapacitated and needs perpetual care, such as entering a nursing home. Especially with the decline of the Social Security system, consider talking to your parents about this for their sakes.
This will insure the cost of your trip if you need to cancel, and will provide care for you if something bad happens while you’re abroad, like an injury. Many credit cards provide this, but to reap the benefits you have to have bought your tickets with the card that has coverage.
Professional Liability Insurance
If you own a business, you need to be covered in case you’re sued for negligence in some way.
An umbrella policy covers you when your liability is higher than the total coverage from your other policies. So, if your homeowner’s insurance covers up to $300,000 and you are sued for $500,000, then you’d use the $300,000 liability coverage of homeowner’s first, and then umbrella would pick up the balance. This insurance often makes the most sense for people with high net worth, as it’s sold in increments of $1 million.
This is almost always required to get a mortgage to buy a house. It insures that you have all of the rights to the property you are buying.
Do the math: If you don’t get pet insurance, you’ll have to pay for vet bills on your own. If you plan to spare no expense for your pet’s health, consider it.
Identity Theft Insurance
To ward off identity theft on your own, check your credit report regularly at AnnualCreditReport.com.