Insurance: The Financial Safety Net for the Things of Value in Your Life

In the game of “what ifs”, how do you protect the things you value most in your life (family, health, home, car, etc) in case something unexpected happens? How would an accident, illness, or injury impact you and your family financially? Insurance is a financial safety net that you can buy to manage the different risks you may or may not encounter throughout your life. Some types of insurance are required (home owners, auto, etc) and some are optional (life, disability, etc). When you buy any kind of insurance, you are transferring some of the risk of loss to the insurance company in exchange for a monthly fee you pay them (called a premium). You enter into a contract (policy) that details what coverage they’re providing, for how long, and how much you’ll pay for it. The insurance company then pools your premium along with others they are insuring, invests the money so it can grow and pay it out when you or other insureds have a claim. Since everyone won’t necessarily have a claim, an insurance company can pay out on large losses. If you do have a claim, you usually start by paying a portion of the loss, called a deductible, and the insurance company typically pays the remainder up to the limits stated in the policy.

Before you run out and buy a bunch of additional insurance, an important first step to protecting yourself and your finances is having some cash on hand to cover some of the unplanned expenses. Building a rainy day fund and emergency fund is the place to start preparing yourself for the unexpected expenses including covering some of your insurance deductibles. You don’t want to file a claim for every small event; your insurance company will increase your premiums or maybe even drop you. Having a cash reserve available that you only tap into when necessary is the base to building a plan to protect your assets. This money should be kept in a FDIC insured savings account that is quickly accessible when you need it. The amount you have set aside in this account is also used to consider the amount of insurance and deductibles you’ll select when buying insurance.

Here are the most common types of insurance that most people consider buying:

Health Insurance: You may have group health insurance through your employer, spouse’s employer, or purchased on the open market. It commonly includes coverage options for medical, dental, vision, prescription drugs and other health related items such as long term care and critical illnesses.

Disability Insurance: This type of policy replaces a portion of your income if you become unable to work due to a longer term illness or injury. It’s purchased to help pay your monthly expenses such as your mortgage payment, rent and other bills (not your medical bills).

Life Insurance: This policy pays a benefit at the end of the insured person’s life to a named beneficiary. It can be used to protect your spouse, family, business, and your future obligations in the event of your death.

Homeowners Insurance: A home is a large investment and your mortgage lender will most likely require a homeowners insurance policy if you have financed your home, so that they are also protected. This policy provides protection from theft, damage from unforeseen events like fire or water and offers liability coverage if someone is injured on your property. There are many different options you may add on to the basic policy such as flood and earthquake coverage.

Renters Insurance:  For those who rent an apartment or other type of home, this type of policy is available to cover the contents of your home in case they are lost or damaged by theft, water, fire or other disaster. The property owner will have coverage on the building / structure, but not on your belongings since it is a rental property. Some landlords will require you to have renters insurance and show proof before allowing you to sign a lease.

Auto Insurance: Most people spend a lot of time in their car, driving to work and/or school every day which exposes you to risk of accidents and injury. This policy helps cover the auto repairs, medical costs and possible legal expenses that could arise from someone being injured in an accident.

Other: There are many other types of insurance that are available but may not be necessary for you (depends on your situation) such as insurance for your cell phone, travel plans, appliances, pet, liability, identity theft and more.