What Insurance?

WE BUY INSURANCE either to protect the property we own or to protect ourselves and our family. Reflecting this, insurance companies are divvied up into two broad categories. Property-casualty insurers offer auto, homeowner’s, renter’s and umbrella liability coverage. Meanwhile, life companies offer disability, health, life and long-term-care insurance.

Add up these various policies and we’re talking about eight different types of coverage. Which of the eight do you need? Here’s a quick rundown:

• Homeowner. If you take out a mortgage to buy a house, the lender will insist that you have homeowner’s insurance. What if you have no mortgage? In theory, you could skip coverage. But that would be unwise: If something happened to your home, the financial loss would be substantial, plus your policy will include liability protection in case folks are injured on your property and they sue you.
• Renter. Like a homeowner’s policy, a renter’s policy will protect the contents of your home, while providing some liability coverage. Do your household possessions have only nominal value? You might skip renter’s insurance.
• Auto. In almost every state, if you own a car, you’re required to have auto insurance. The policies can be costly, in large part because of the liability coverage. Still, you can often reduce the cost substantially by raising the policy’s deductibles to $1,000 or more—something those with homeowner’s insurance might also consider.
• Umbrella liability. The liability coverage included with homeowner’s and auto policies might be capped at perhaps $300,000. Problem is, if you were deemed liable for injuries suffered by others, a jury verdict could be substantially more than $300,000. To address that risk, you might supplement your homeowner’s and auto insurance with an umbrella policy that provides additional liability coverage.
• Life. Got a spouse, children or others who depend on you financially? You likely need life insurance, unless you have substantial savings. Indeed, if you have a young family and you’re early in your career, you should probably have a large amount of term insurance, which can provide ample coverage for a relatively modest premium. But as the kids leave home and as your wealth grows, you might drop coverage, knowing your family would be okay financially if anything happened to you.
• Health. Many people view health insurance as a way to pay for routine medical bills. But its real value lies in two other benefits. First, if you have health insurance, you enjoy the price discounts that insurers negotiate with medical providers. Second, policies come with out-of-pocket maximums. Those maximums can be high. Still, they protect you from the sort of six-figure medical bills that can push folks into bankruptcy.
• Disability. Your most valuable asset is often your human capital—your income-earning ability. What if you have an accident or a serious illness, and you’re unable to work? Disability insurance ensures you can still cover the household bills. With any luck, you’ll have coverage through your employer. If not, you should explore purchasing a policy on your own.
• Long-term care. This has been a black eye for the insurance industry, which has historically mispriced long-term-care (LTC) insurance and then, to stanch their own financial losses, foisted huge premium increases on existing policyholders. Result? Today, many buyers of LTC insurance eschew traditional policies and instead favor hybrid policies, where premiums are guaranteed. Better still, you might save diligently for retirement, so you’re able to skip LTC coverage and instead self-insure.

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