Basic Insurance Types: Protecting Your Financial Future

Selecting an insurance product can be a daunting task. With so many options, it may be confusing to know which direction to take. There are several types of insurance products out there, and this article will give you a brief overview of the most common ones. 

Life Insurance

Life Insurance is a legally binding contract where the insurer guarantees a death benefit (a financial payout) to named beneficiaries after the insured has died. The promised death benefit is in exchange for premiums based on the insured’s life expectancy. The higher the health risk you have, the higher premium you will pay.  Life insurance comes in several forms, such as temporary life insurance and permanent life insurance. To analyze how much insurance you need and for how long, estimate potential costs that your survivors would incur if you weren’t around. The primary estimation method is the human life value approach, used by calculating your total earnings until retirement and deducting expenses, income taxes, and insurance premiums. If you are at risk of developing a condition such as heart disease or diabetes, have young children, live in a single income family, or own a home where the mortgage would be overwhelming for your partner to pay alone, life insurance is necessary. 

Long Term Care (LTC) Insurance

LTC insurance provides home health care or nursing home services for senior citizens with a chronic/disabling condition. The plan can cover expenses such as a live-in caregiver, therapist, or housekeeper. LTC insurance is costly, but premiums are cheaper when you buy younger, as with life insurance. For context, approximately 52% of people will need long-term care at some point after age 65. While expensive, this type of coverage provides yet another safety net in the event of an illness or disability. 

Disability Insurance

Disability Insurance (DI) is for individuals who cannot perform their work and earn money due to a disability. Your chances of becoming disabled are higher than your odds of premature death, and purchasing this type of insurance is certainly something to consider. The average cost is between 1 and 4 percent of your annual income. Short-term DI lasts for 3-6 months, and workers get a portion of the salary when they are away from the job. Long-term DI is similar, except these benefits sometimes span a lifetime. It generally makes more sense to buy long-term disability coverage. While most disabilities are short term, not having this backup could be disastrous to your finances in the event of long-term impairment. 

Umbrella Policy

An umbrella policy is an extra liability insurance coverage, which kicks in after regular insurance has been exhausted. This option is generally useful to high net worth individuals, people at an increased risk of being sued, or small businesses who need to guard against potential monetary damages. Consider your assets, whether you operate a home-based business, or if you own dangerous objects such as trampolines or swimming pools, before purchasing an umbrella policy. 

Before you decide on an insurance plan, conduct some research, and potentially meet with an advisor for more guidance. Having a firm grasp over your finances is imperative to creating the right system for you. Any time you have major life shifts such as a child’s birth, a marriage or divorce, the purchase of a home, or a change in jobs, your insurance needs may change. Constant reevaluation is critical, and the earlier you purchase, the cheaper premiums are.