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Some of the Personal Finance content I will be writing about in this series of articles may be obvious or rudimentary to many of my readers but it also may be of great value to young people you may know. Please share this information with those you believe will best benefit from it.
What do you need to know about Insurance?
There are many types of Insurance. The Insurance types that affect most everyone includes:
- Life Insurance
- Health Insurance
- Auto Insurance
- Homeowners Insurance
- Tennant Insurance
- Disability Insurance
- Other Insurance
Life Insurance
Life Insurance is either Term or Permanent Insurance. In either policy, you name a Beneficiary. If you die, the Beneficiary receives the Death Benefit of the policy.
Term Life Insurance is temporary, meaning it only lasts for one year. And each year, the Premium you pay on Term Insurance can increase as you get older. You can buy Term Insurance Policies which lock in a Fixed Premium amount for 10, 15, 20 or even 30 years.
Permanent Life Insurance is not temporary. So long as you pay the Premium, the Policy remains in effect. Like Term, you can fix the Premium amount for 10, 15, 20 or even 30 years. Permanent Life Insurance Policies typically have an additional feature – something called Cash Surrender Value (CSV). CSV increases each year the Policy is in effect. You can borrow up to 90% from the CSV, if you need money in retirement. You can also instruct the Insurance Company to use the built-up CSV to pay the Premiums, in order to keep the Policy in effect.
If you have a family, with young children, it is a Smart Money Habit to have Life Insurance. The purpose of Life Insurance for young families is to prudently invest the Death Benefit proceeds with the goal of generating enough annual income from the invested Death Benefit to replace the annual lost income when a parent/spouse dies. How much you need depends on numerous factors, such as: your cost of living, annual earnings that would be lost upon death, debt, college funding and other factors.
Health Insurance
The ultimate purpose of having Health Insurance is to insure against catastrophic medical costs associated with some health emergency. Most employers offer a company-sponsored Health Insurance Plan. Some company Health Plans include Health Savings Arrangements (HSAs) or Flexible Spending Arrangements (FSAs). HSAs and FSAs allow you to contribute part of your income to the HSA or FSA in order to fund annual out of pocket medical costs. The income you contribute to an HSA or FSA reduces your W-2 Income dollar for dollar.
If your employer does not offer a company-sponsored Health Insurance Plan, you can obtain private health insurance through the State in which you live. Every State has different levels of Health Insurance that comply with the provisions of the Affordable Care Act (aka Obamacare).
Auto Insurance
Auto insurance exists to help cover the costs associated with accidents. Auto Insurance is mandated in every State. Depending upon your age, where you live, driving history and the type of car you drive, the cost of Auto Insurance, per car, can range from less than $1,000 a year to as much as $10,000 per year.
Homeowners Insurance
Homeowners Insurance covers certain, specific events that can cause significant damage to your home, such as hurricanes, fires, certain types of water damage, trees falling on your roof, etc. If you have a mortgage, the Lender will require that you maintain Homeowners Insurance. If you do not have a mortgage, carrying Homeowners Insurance is voluntary.
Tennant/Renters Insurance
Tennant/Renter’s Insurance protects the Tennant and Landlord from the costs of someone getting injured in the apartment. This includes Medical Expenses, Liability Protection, Attorney Fees. It will also protect a Tenants personal property. Renter’s Insurance costs about $25/month or $300/year. Some Landlords will require Renter’s Insurance. If required, it should be spelled out in the Lease.
Disability Insurance
If you become disabled, Disability Insurance will typically pay you about 60% of your Gross Pay, while you are disabled. The State in which you live has a government version of Disability Insurance that will pay you a specific amount every week for approximately 16 weeks, depending upon the State in which you live. State Disability Insurance is short-term in nature.
Some employers offer Disability Insurance that kicks in if you are disabled for a period that exceeds the State Disability Coverage Period.
You can also purchase private Disability Insurance that will not only cover you beyond the State Disability Coverage Period but also if the disability prevents you from performing the exact same job you had prior to becoming disabled. This is known as an Own Occupation Disability Insurance Policy.
Other Insurance
- Long-Term Care (LTC) – A LTC Policy will provide you with money when you are unable to perform at least two out of five Activities of Daily Living (Feeding, Bathing, Dressing, Toileting & Transferring). LTC plans fund skilled nursing care either within your home or outside the home. LTC Policies help relieve the burden of children having to become the sole caregivers for an elderly parent.
- Comprehensive Insurance – This type of Insurance covers some of the Liability Events that Homeowners Insurance does not cover, such as someone getting hurt on your property.
- Professional Liability – This type of Insurance protect you if you have a profession that exposes you to personal liability due to the nature of the service you provide, In the medical world, it is commonly known as Malpractice Insurance.
Tom Corley is an accountant, financial planner and author of “Rich Kids: How to Raise Our Children to Be Happy and Successful in Life”, Effort-Less Wealth, Change Your Habits Change Your Life, Rich Habits Poor Habits and “Rich Habits: The Daily Success Habits of Wealthy Individuals.”
