Week 8: 4 Essential Insurances - Are You Fully Covered?

Now that you've had some time to organize your taxes, let's move on to the topic of insurance.

In case you missed one of our newsletters, check out weeks 1-7 below:

Week 1: Assessing Your Current Financial Health

Week 2: Setting Up a Budget

Week 3: Establishing Financial Goals

Week 4: How to Get Out of Personal Debt··· For Good!

Week 5: Slashing Your Spending & Expenses

Week 6: Making the Right Investment Choices

Week 7: The Fool-Proof Guide to Taxes

This week's Activities for Success:

1) Complete the Life Insurance Calculator.

2) Look through your current coverages and confirm your benefits

3) Ensure that your spouse or partner has the appropriate coverage

Insurance. We hear about it every day online, on TV and pretty much everywhere else there is advertising.
Health Insurance... Life Insurance... Homeowner's Insurance... Auto Insurance... with all of these different types, how can you be sure you are getting the coverage you need?

This issue of Personal Finance Guide will help you to understand the different types of insurance and the minimum coverage that you should have for each.

Life Insurance

Life insurance protects your family in the event that something happens to you. While unpleasant to think about, it's something that you need to be covered for and the sooner you get coverage, the less it will cost you. There are two different types of life insurance: Term and Permanent.

First, take a moment to complete the Life Insurance Calculator below to find out more about your personal life insurance needs.

Term life insurance covers the insured for what is usually a relatively short period of time. All of the money from the premium is used to pay for the insurance itself. Therefore, at the end of each term, the policy must be renewed. The policy does not accrue equity for the insured. There is no penalty for not renewing a term life policy because the insurance company is not in possession of an asset. If the insured dies during the term of the policy, the policy pays off at its face value. Term life policies are generally tax-free and may even allow for a partial payout upon diagnosis of a terminal disease. For young people, term life insurance is often the cheapest option. However, the price will increase as you age because health problems show up over time, and for the simple reason that the older you are, the higher the chance that the insurance company will have to pay a settlement. Another downside is that if health problems materialize and your policy is non-renewable, your premiums may increase or you may no longer qualify for insurance. This problem can sometimes be avoided by paying higher rates for renewable term life, allowing you to renew the same policy without re-qualifying. A policy may also be designated convertible, which means that the insured can convert the policy to permanent life at a later time.

Permanent, or cash value, insurance is an umbrella term for a variety of plans that combine a death benefit similar to a term life plan with tax-sheltered savings arrangements. Permanent life policies, as their name implies, are meant to be held and paid into for the duration of the insured's life. Because of this, there are significant fees associated with setting up the policy. Despite these fees, the tax advantages can make permanent life a valuable investment over a long period of time. The policy is always renewable and premiums are fixed and calculated based on the age of the insured when the policy is initiated. If the death benefit is paid early in the policy, the money will come mostly from the insurance policy, and, if the death benefit is paid late in the policy most of the money will come from the savings account. As the savings become more and more significant, less insurance is needed to hold down the cost of insurance as the holder ages.

Read more about Life Insurance here »

Auto Insurance

Car insurance is an absolute necessity for anyone who drives a car. Even ignoring the fact that some types of car insurance are mandated by law, coverage is essential: the potential costs surrounding an accident - whether they be repair/replacement costs of the cars or other property, or medical costs of the victims - are simply too huge to run the risk of being without adequate coverage.

Car insurance policies can be divided into two distinct categories: third-party liability and first-party insurance. In car insurance terminology, the owner of the policy is the first party, who has contracted with the second party (the insurer) for the coverage. The third-party is the other person(s) in the accident, or the person(s) whose property the policy-owner damaged. Thus, in general, third-party liability insurance covers the damages to other people that are attributable to the policy-owner. First-party insurance covers damages that are done to the policy-owner or his passengers.

At least some amount of third-party liability coverage is required by law in most states; for the most part, first-party coverage is not. However, car insurance is not the place to save money by cutting corners; a single accident could easily wipe out someone's life savings, whether they're at fault or not. Also, price isn't everything… if the insurance company balks at every claim, low premiums are meaningless. However, if you haven't shopped around for insurance in a few years, you may be able to find lower rates while keeping the same coverage.

Read more about Auto Insurance here »

Health Insurance

This is probably the most important insurance to have. Health insurance provides coverage for medicine, visits to the doctor or emergency room, hospital stays and other medical expenses. Policies differ in what they cover, the size of the deductible and/or co-payment, limits of coverage and the options for treatment available to the policy holder. Many people receive health insurance from their employer as a benefit, but others must shop around for the right policy.

Read more about Health Insurance here »

Homeowner's Insurance

The final type of insurance that we'll highlight today is homeowner's insurance.
Most homeowners don't have a choice in whether to purchase this kind of insurance - it is usually required by the mortgage lender. But even if the mortgage is paid off, experts say homeowner's insurance is a good buy. A decent homeowner's policy not only protects the house, but all the possessions inside. Further, homeowner's policies cover personal liability due to negligence, including damage to another person or their property, and will provide legal defense up to the policy limit. Note the policy only covers negligent behavior - if the prosecution proves intent, the insurer will not pay out. And if you have substantial assets, you should consider purchasing additional insurance, called “umbrella coverage”, to protect against liability.

Read more about Homeowner's Insurance here »

Other Types of Insurance

Keep in mind that there are other types of insurance that may be important to you, including disability, travel, personal asset, etc. To find out more about these other types of insurance, click here.

This week's Activities for Success:

1. Complete the Life Insurance Calculator.

2. Look through your current coverages and confirm your benefits

3. Ensure that your spouse or partner has the appropriate coverage

Stay tuned for next week's issue, which will cover The Definitive Guide to Retirement Planning.
By InvestorGuide Staff

Copyrighted 2020. Content published with author's permission.

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