What are the important types of insurance to have?
No matter where you are on life’s journey, it makes sense to do an insurance “audit.” What are the important types of insurance to have right now — given your age, family and professional responsibilities, financial situation and goals?
Insurance offers protection
For starters, remember that all types of insurance are designed primarily to protect you and your loved ones (and perhaps your business) from financial uncertainties and risk with a death benefit. While insurance can’t prevent bad things from happening, it can help protect your most important possessions — health, ability to earn an income, and assets — when life throws you a curve. As you’ll see, one of the most important types of insurance may even provide a way to build cash value, which can be used during your life to fund things like mortgage payments, education and loans.1
Let’s look at ways to help protect what matters most to you.
No surprise here. In most states, auto insurance is mandatory for drivers.2 Required coverage types and minimums vary from state to state, so check with a reputable insurance company for guidance. Without a policy, you are likely putting yourself in legal jeopardy and taking a huge financial risk. Even a minor fender-bender can result in thousands of dollars of damages. Add in medical bills and disabling injuries — see health insurance and disability insurance below — and the costs can be astronomical.
Another must-have. Healthcare is expensive, and even one trip to the emergency room can be devastating financially if you’re uninsured. In fact, the inability to pay medical bills is the number one cause of personal bankruptcies.3 And going into debt can derail your other financial goals. Nearly half of people with medical debt say that it prevented them from buying a house or saving for retirement.4 Here are three ways to help avoid that burden.
- Purchase the health insurance you can afford. Sign up for employer-sponsored health insurance, if available. It’s often the easiest and more affordable option.
- Explore the ACA marketplace. The Affordable Care Act has made health insurance more economical for people with low-to-moderate incomes and the self-employed. If your income is extremely low, look into Medicaid coverage or state assistance — coverage is better than no coverage at all.
- Consider a Health Savings Account. It’s a tax-advantaged way to set aside money to help cover out-of-pocket medical expenses.
Of all the important types of insurance, life insurance may be the least understood. Often there is a misperception that life insurance is only for those who are older or have considerable wealth. The fact is, life insurance provides confidence at any age — confidence that you can live your life to its fullest knowing that those who depend on you will be protected if you pass away.
Why do you need life insurance?
In the event of your death, the proceeds from a life insurance policy will help your loved ones maintain their lifestyle, avoid financial hardship or bankruptcy, and pay essential bills such as rent, mortgage, health insurance, college tuition and loans.
Types of life insurance
There are two main types of life insurance: term and whole life insurance. Either one provides meaningful protection and can be a good option depending on your needs.
Term life insurance
Term life insurance provides temporary protection for a specific period of time, typically 10, 20 or 30 years. For example, if you have children, you might choose a term long enough to see them out of the house and through college. For a young, healthy adult on a limited budget, term life can be an affordable choice. However, when the term ends, you’re no longer protected, and the policy does not build any residual cash value.
Whole life insurance
Whole life insurance is the simplest form of permanent life insurance coverage and a lasting financial asset. It can be one of the best options for people who want lifelong protection and wealth-building cash value.5 In addition to providing a guaranteed death benefit with locked-in premiums,6 a whole life policy allows you to build cash value that can be applied toward goals during your lifetime like the purchase of a new home, funding education or a business and supplementing retirement income.7
The right amount of whole life protection depends on where you are in life, your responsibilities, and your earning potential, among other factors. Generally speaking, the younger you are, the more years of income you need to take into account when deciding on the policy amount.
We tend to think of insurance as protecting only tangible assets, like homes and cars. But what about intangible assets, like the ability to earn a living? If an accident or illness prevented you from working for an extended period, your financial well-being could take a serious hit.
What is disability insurance?
Disability insurance helps you bridge the paycheck gap by replacing a percentage of your lost income. It’s typically income tax-free and you can even use the money to cover retirement contributions and student loan payments.
Disability is not rare
Don’t fall for the myth that disability insurance is only for rare, catastrophic accidents. Over one in four of today’s 20-year-olds will become disabled during their working years.8 And almost 90% of long-term disabilities are caused by common illnesses, such as heart disease and arthritis.9 The point is, if you’re too ill or injured to work for any reason, you shouldn’t have to worry about money. Supported by disability insurance, you can use your energy to recover.
A financial professional can help
Learning about the most important types of insurance is a good start in building your financial confidence. Consider speaking with a financial professional to discuss your needs and goals and explore your risks. They can help you decide how much protection to get and which type of policy or policies fit your specific situation.
1 Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.
2 The Minimum Car Insurance Required In Your State, Forbes, November 22, 2022
3 This is the real reason most Americans file for bankruptcy, CNBC, February 11, 2019
4 Over half of Americans have medical debt, even those with health insurance—here’s why, CNBC, March 11, 2022
5 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.
6 Guaranteed premium payments are required to be paid EACH year of the policy to lock in the guaranteed benefits and if not paid, the policy may lapse.
7 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.
8 “Chances of Disability,” Disability Can Happen https://disabilitycanhappen.org/overview/, February 2020
9 Integrated Benefits Institute, 2018 Health and Productivity Benchmarking, Long-Term Disability.
Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. Neither Guardian nor its subsidiaries issue Auto or Health Insurance.
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2022-146949 Exp. 11/2024