Insurance is more than protection; it's peace of mind. While it protects you, your family, and your property (like your home and car) from the risk of a large financial loss, it also assures that if the unexpected happens, your family will be financially safe.
And while insurance won't make you a hit at your next cocktail party, it will help you sleep better at night, knowing that you have a plan in place to protect the people you love. The good news is that insurance is a simple and cost-effective way to take the risk of a large financial loss your family faces and transfer it to an insurance company.
Here's what you need to know about four essential insurance policies you need to keep your family safe and sound.
Start with evaluating your risks to protect what matters most
The amount of insurance that is right for you is a very personal matter. The type of insurance and the amount of coverage depends on the following:
- Your family situation
- Your income
- The things you own, like your home or cars
- The amount of your savings and investments
- The amount of debt you carry
The single biggest mistake people make is to assume they are adequately protected because they have insurance in place. The truth is, you need to evaluate your situation, understand the risks you might face (and what that would mean financially for your family), and get the right insurance.
The four types of insurance we all need (especially parents)
Here are the types of insurance policies you need to protect your health, income, and your family from the unexpected in life.
1. Health insurance
Most of us get our health insurance through our employers. The big decision is typically between a traditional health plan that gives you access to flexible spending accounts (FSAs) for dependent care and general healthcare and high-deductible plans, which provide access to a health savings account (HSA).
For most families, especially those with younger children, the traditional plans can make more sense as they may have lower deductibles and will cover more of your expenses even before hitting the full deductible. If you choose a traditional plan, make sure you take advantage of the FSAs to cover dependent care (like daycare) and other expenses with pre-tax money.
2. Disability insurance
Disability Insurance is another benefit provided primarily by employers. Most companies will offer both short-term and long-term options. Short-term benefits replace your income for a few weeks or months until your long-term benefits kick in. If you have a strong emergency fund, you may be able to skip the short-term coverage.
Long-term disability insurance is a must for everyone. You need to know what part of your income is covered (base pay or base and bonus), what the maximum monthly payment is, how long you would have to wait for benefits to start, and whether or not your benefits would be taxable (you can choose in some cases).
3. Term life insurance
If you have children, especially if they are younger, you need life insurance and likely more than you think. The rule of thumb says you should have at least ten times your annual salary and possibly more. The amount of life insurance that is right for you will vary based on your income, the age of your kids, the assets you own (car and home), your debt, and your savings and investments.
The biggest mistake that most parents make is thinking that their life insurance through work – group coverage – is sufficient. Group insurance is typically limited to a multiple of your salary, like four or six times your annual income. That is often not enough, and you likely need to look for your own insurance coverage.
4. Property & casualty insurance (P&C)
P&C insurance protects the things you own. There are three types of policies most families need: automobile, homeowners (or renters), and an excess liability policy (also called umbrella insurance).
For automobile and homeowners, you are essentially looking to protect against damage to property – your car, the other driver's car, or your home – and liability due to an injury – aptly called liability coverage. The amount of coverage you need should be discussed with an insurance agent or a financial planner that can help identify your risks and appropriate coverage.
An umbrella policy provides liability protection above and beyond what your auto and homeowners might provide. These policies are typically very affordable, given they are like backup plans for your home and auto coverage. They usually come in $1 million increments, so you can easily get a lot of coverage.
Evaluating and adjusting your protection over time
To ensure you and your family are properly protected, your insurance coverage needs to be evaluated periodically and when there are any major life events or milestones (marriage, kids, new home, or car). Reviewing your coverage at least once per year is a smart move. You don't want to find out you have a shortfall or gap in coverage after you experience a financial loss.
Final word
Insurance isn't the most thrilling topic. Buying something you hope never to use can feel strange or unnecessary, but insurance gives your family a safety net and essential protection for what matters most. With proper insurance in place, you can live worry-free and spend your time planning for and living the life you want for your family.
Financial planning, as it should be, can help you evaluate your risks and make sure you have the right insurance in place. And a CFP® Professional at Facet can help you see all of your options, evaluate your coverage, and help you make the best decisions.
