Possibly, but probably not! Many people are surprised by how little the “bare minimum” plans cover. The highest level of coverage might be more than you’re looking for, but chances are your ideal level of coverage lies between these two levels. For that reason, it is important to meet with a specialist who can help tailor a plan that is right for you.
Uninsured Motorist Coverage – This covers damage to you and your car if you are hit by another motorist who does not have insurance (or their insurance company is insolvent). It also covers the situation where you are in a hit and run accident (where the person who hit you flees the scene).

Underinsured Motorist Coverage – While the names sound the same, uninsured and underinsured coverages are quite different. Underinsured coverage covers the situation where the other person who hit you has coverage, but it is not enough to cover the accident.

Damage to your auto (Collision) – While liability coverage covers the cost of repairing another person’s vehicle, it does not cover the cost of repairing yours. This covers damage to your automobile regardless of whether or not you are at-fault for the accident.

Damage to your auto (Other than Collision) – This coverage reimburses you for damage to your vehicle caused by something other than a collision. For example, a tree limb falling on your car would be covered here. It is not caused by a crash, but it certainly causes damage!

It is important to realize what your plan does not cover. These are all examples of things that you may want to consider when choosing your plan!
Not exactly. An insurance deductible is the amount that you pay out of your own pocket before the insurance company starts paying. For example, let’s say that your policy has a deductible of $500. Your car has $1,500 of damage. You would pay the first $500 out of your own pocket to get the car repaired. The additional $1,000 would be paid by insurance.

If you have a higher deductible, you will pay less for your insurance. However, that also means that you will owe more money if a claim happens. If you have a well-funded emergency fund, you may be able to have a higher deductible on your auto insurance. If you do get into an accident, you can simply use those savings (and then replenish the emergency fund as soon as possible). If you have trouble saving money though, it is usually important to keep lower deductibles. That will allow you to have less money out of pocket in case of an accident.
Insurance companies will often use shorthand to say how much coverage a person has. The first two numbers have to do with liability coverage for bodily injury. If you have 100/300/100 coverage, it would mean that your coverage for bodily injury was $100,000 per person up to $300,000 per accident. The last 100 is for the amount of liability coverage you have for property damage. In this example, you would have $100,000 of coverage for property damage you cause.
This is the magic question. The technical answer is that you should get enough insurance to cover you in any accident that you can envision. For example, if the most damage that you could ever cause in accident is $100,000 – you should get $100,000 worth of coverage. The problem is that this number is very difficult to figure out. How do you know how much damage you could ever actually cause?

For this reason, it may be helpful to simplify the problem. You should always get coverage for property equal to the value of that property. In other words, get enough coverage to cover the replacement value of the car, house, boat, or any other property you might own.

Liability coverage is trickier. It is often best to think about how much you would be willing to pay out of pocket for an accident that was your fault. If you never want to pay anything out of pocket, it is best to get the greatest amount of coverage possible. If you are okay with the thought of paying something out of pocket for a large enough claim, then a lower package might be okay. If you are in doubt, guess high. You might be surprised at how much a claim truly costs!
If you rent, you typically want to have a renters policy, which covers the personal belongings inside your residence – furniture, electronics, household items, etc. You don’t need to worry about covering the apartment living space itself, since this will be covered under the owner’s insurance policy – only the items you own. You should have coverage equal to the value of the items that you own. Estimates are okay - but generally it is advisable to guess high. The price difference is normally not that much for a few thousand dollars more of coverage and it is always better to have a little too much coverage, rather than not enough.

Most people accumulate more and more things each year. For this reason, it is important to adjust your coverages each year to make sure that your insurance is still at an adequate level to cover the value of your property.
Homeowners insurance is a bit different from renters insurance, because you are covering the cost of damage to your home in addition to covering the contents in it. In general, you want to have coverage that is equal to the value of your home. Contents coverage is typically included as a part of the standard policy.

One thing that many people are surprised to learn is that homeowners coverage may not cover high value items that you have inside your home. For example, let’s say that you own expensive jewelry, one of a kind artwork, or even a priceless collection of baseball cards. While the standard homeowners policy would provide some coverage, it would not cover the full value. A separate policy may be needed cover these items. You also may need a separate policy to cover motorcycles, boats, or other types of unique equipment.

Most people accumulate more and more things each year. Values of homes may go up substantially from one year to the next. For this reason, it is important to adjust your coverages each year to make sure that your insurance is still at an adequate level to cover the value of your property.
In this day and age, it is not unusual for people to work from home. You may also need a separate business policy to cover your home-based business. This is especially true in situations where you are seeing clients in your home or you have special business equipment. In these situations, you will often need a business policy. Most homeowners policies have little (if any) coverage for business activities. They are made for the personal use of your residence only.
While health insurance and disability insurance may appear to be similar on the surface, they cover very different things. Health insurance is meant to cover medical costs for treatment of physical and some mental health issues. Health insurance generally reimburses or covers the actual cost of treatment. If the bill for your treatment is $100, insurance might cover $65 of it. If you do not receive treatment, then health insurance will not reimburse or cover anything. Many routine or annual treatments are covered through health insurance, like annual physicals.

Disability insurance is meant to cover the income lost when a person becomes disabled. Disability causes someone to be unable to work. Since they are unable to work, they are unable to bring income into their household. They don’t pay for medical costs or any additional costs a person may have by being disabled. Disability insurance only covers the missed income as a result of the injury or issue – not any specific treatment. For this reason, disability insurance coverage is based on the wages or self-employment earnings of the person – regardless of any medical treatment they are receiving. The more a person gets paid, the bigger the disability insurance payout will be if a claim happens.
The number of options and features when it comes to health insurance can be overwhelming. In many cases, people get their health insurance through their employer. In that instance, they will need to make decisions regarding their health coverage each year at open enrollment. Employers may have one health plan or many, but what the decision essentially comes down to is whether or not the plan covers what you need.

To start with, you should look at whether or not trips to see your main doctor (primary care physician) will be covered under the plan. If you get your annual physical at their office, would this be a covered expense? Second, if you have any regular prescriptions that you use, is this a covered expense? Third, think about mental health professionals, chiropractors, and other professionals that help you maintain your well-being. Are visits to them covered under the plan? The bottom line is that you need to think about all the professionals you see on a regular basis. If they are not covered, then how you will get this care? Would you be willing to go out of pocket? If so, we would need to incorporate this into your budget (see Step 1).

Aside from looking into whether or not these items are covered, you should also pay attention to deductibles and how much of the premium is covered by your employer. Deductibles can add up quickly in situations where you have regular expenses, like medications. Also, insurance premiums can take a large chunk out of your paycheck, if your employer only covers a minimal percentage of the cost. The key is reviewing these things before you receive your first paycheck, so it is not a surprise!
If you are looking to save a few dollars and you do not go to the doctor that often, a health savings account (HSA) may work well for you. An HSA is a tax-deferred savings account for medical expenses. You (or your employer or both) put money into the HSA. The money grows tax-free over time. You can then pull from the account to cover your medical costs (although it is likely to be taxed).

With an HSA, you must have a high-deductible health plan. While you can use funds from your health savings account to cover this deductible, funds must have had a chance to accumulate in the account first. For example, let’s say that you have just started contributing to your HSA. The balance in the account would be zero (or very close to it). If you were to get sick right away, you would need to cover the deductible amount from your savings (since no HSA funds would be available). Therefore, it is best to open an HSA when you already have some savings in an emergency account or another source. It is also best if you are someone who resists going to the doctor a bit.

A health savings account is not for everyone. However, it can work well for certain people. While many employers offer an HSA, not everyone does. If you are self-employed, you may be able to take advantage of an HSA in the marketplace when you buy your health insurance. Remember – even if you don’t choose an HSA, you just need to know if your health insurance will cover your needs and how much it will cost, so you can budget accordingly.
It is true that many people have some form of disability insurance through their employer. However, just having disability insurance doesn’t mean that it is enough. Many employer disability insurance policies will cover about 50% of your paycheck if you become disabled. Therefore, the question is not whether or not you have disability insurance. The question is really could you live on approximately half of your paycheck if you were to become disabled? If you can, then the coverage provided through your employer may be fine. If you can’t, you may need to buy some additional insurance.
The Social Security system in the United States does offer disability insurance. However, in order to obtain benefits, several requirements must be met. According to the Social Security Administration (2024) website: “We consider you disabled under Social Security rules if all of the following are true:

You cannot do work that you did before because of your medical condition.

You cannot adjust to other work because of your medical condition.

Your disability has lasted or is expected to last for at least one year or to result in death.”

In addition to this, you also have to have enough quarters of coverage (QCs) through the Social Security system in order to qualify as disability insured. In general, this means that you must have earned a minimal amount of wages (or self-employment income) in the last 10 years in order to gain access to benefits (technically, the requirement is that you need to have at least 20 QCs in the last 10 years. A QC is a minimum amount of wages or self-employment income necessary to get “credit” for Social Security purposes. The amount necessary to obtain a QC is adjusted for inflation each year – so it is not a standard amount. However, in 2024, you would have needed to have at least $1,730 in wages or self-employment income in order to get one QC).

The bottom line here is that it is very difficult to qualify for social security disability benefits. You can’t engage in any gainful employment. In fact, many Social Security disability benefits get denied on the first try. When this happens, there is an appeals process – but it can take some time to work through. Finally, even if the claim is accepted, you generally must wait 5 months before you begin receiving benefits. This means that even in the best scenario (the claim is accepted), you will still need to cover your living expenses for 5 months using savings or other funds available to you. That’s a long time! Therefore, while it is true that many people are eligible for Social Security disability benefits, most people do not qualify. It is often unwise then to count on Social Security to provide benefits when you need it.
People often expect disability insurance to cost about the same as life insurance. These are two different insurance products, so how the insurance company prices them is different. When figuring out the price of any insurance product, insurance companies generally take into account three things: average claims cost, their administrative and servicing costs for that policy, and their profit margin. If you add these three components together, this is basically the premium that the customer pays. If any of these components increases, then the cost of the policy goes up as well.

In the vocabulary of the insurance industry, a disability insurance claim is often a “long-tail” claim. This means that there are a series of payments made by the insurance company to the insured over a time period. In contrast, life insurance claims are only paid out when a person passes away. From an insurance company’s perspective, life insurance claims are paid out one time, while disability claims may result in multiple payouts and a higher average claims cost. Since average claims cost is normally higher for a disability claim, it makes sense that disability insurance is normally more expensive than life insurance.
There are several uses for life insurance. However, for most people, the answer to this question is yes. Most people have someone who depends on them financially. If you have children, your children depend on your income in order to maintain their standard of living. If you pass away, life insurance would provide them that income source that they no longer had. If you are married, your spouse might depend on your paycheck for the same reason. Without it, they may not be able to pay the mortgage, maintain the household, or pay for childcare. This would also be a reason to get life insurance.

If you are unmarried and have no one who depends on your income, a case can be made that you don’t need life insurance. However, even in this instance you still may want to get life insurance. Let’s say that you want to leave one big gift to your favorite charity or school when you pass away. One way to accomplish this financial goal is to purchase life insurance with the charity or school named as the beneficiary. What if you want to leave your house to a friend or family member, but the house is encumbered by a mortgage. You could purchase a life insurance policy large enough to allow the person who inherits the house to pay off the mortgage.

Life insurance is a very versatile product. It can be used to transfer business interests, even out inheritances, pay off debts, and even leave legacy gifts. While it is possible that a person may not NEED life insurance, often times people want it to accomplish their financial goals. You may be able to leave hundreds of thousands of dollars to a charity or person while only paying a few hundred or a few thousand dollars in premiums. In this way, life insurance is very financially efficient. It is also can be very tax efficient as well. In many situations, the recipient of life insurance proceeds does not need to pay taxes on the amount they receive.
This is a hard question, because life insurance can be used for so many different things. The amount you need depends on what you are planning to use it for. If you are using it to make a big charitable contribution or a gift to someone at the end of your life, the amount you need is simply the amount that you want to give. If you want to give $500,000 at the end of your life to your church or synagogue, you would need $500,000. If you are trying to leave enough to cover a debt (like a mortgage), you would need life insurance in an amount equal to the debt you are trying to cover. If the mortgage has a balance of $200,000, you would need life insurance of $200,000. These situations are pretty straightforward.

What may be more difficult is trying to figure out how much insurance is needed to cover the needs of someone, like a child or spouse, if you pass away. In this instance, you need to think about the impact on the household when you pass away. What expenses would they need to cover? When a person passes away, the household expenses do not get cut in half. The family members that are still living need to pay 100% of the mortgage, 100% of the electric bill, 100% of the cable bill, and 100% of property insurance – just to name a few. So at the very least, you would need enough insurance to cover these costs for the remainder of time that you would have worked.

In general, life insurance is meant to cover the years that you would have continued to work if you were still living. So for example, if you were planning to retire in 20 years, you should ideally purchase insurance that would cover the expenses your family or beneficiaries would have for the next 20 years. Life insurance in this instance is meant to cover the income that is lost from you no longer living. Once you are retired, you no longer need life insurance, since you are no longer generating income for your beneficiaries anyway (again, unless you wanted to leave a bequest).

For many people this number is very difficult to come up with. Trying to estimate how much in expenses you might need to cover for your remaining working years for your loved ones if you passed away is a complex calculation. For this reason, many financial advisors have rules of thumb. One way to calculate how much in expenses they need to cover with insurance is to take their yearly salary and multiply by 10. This is normally more than enough to cover their insurance needs. In general, it is always best to have more insurance rather than less.
In general, if you want a larger amount of money to be left to your beneficiaries, you need to pay a higher premium amount. However, if you can’t afford the insurance amount that you need, the best thing to do is simply pay for what you can now and get as close to the amount of coverage you need as possible. Then purchase more coverage in the future until you have enough. There are several things that can affect the cost of a policy though outside of just the amount of coverage you want:

Term policies are generally cheaper when you are younger – The chances of you passing away increase as you get older. If you buy term insurance, the policy is generally cheaper when you are younger (since there is a lesser chance that the insurance company will have to pay a claim). These policy costs could get considerably more expensive though as you get older.

A policy for someone who does not smoke usually costs less than a policy for someone who does – Insurance companies realize that smoking greatly reduce one’s life expectancy. Shorter life expectancy means that they will likely need to pay a claim sooner. Therefore, a policy on a smoker tends to be more expensive.

Paying each year is generally cheaper than paying by the month (or another shorter interval) – Insurance companies normally charge an installment fee for processing your payment each month. If you pay your premiums annually, you normally do not need to pay this installment fee.
There are two main categories of life insurance – term and permanent policies. Term policies are exactly what they sound like. They provide coverage for a certain amount of time (a “term”), for example, 1 year, 5 years, 10 years, or longer. After the term is over, the policy would need to be renewed for another term in order for coverage to stay in-force.

Let’s say that there is a 5-year, $100,000 term insurance policy that exists on your own life. If you pass away during that 5-years, the policy will pay your beneficiaries $100,000. If the policy was not renewed and you passed away after 6 years, your beneficiaries would not be paid anything. The policy will only pay out a benefit if coverage is in-force during the policy term (5 years in this example).

Term life insurance is often structured as level-term policies. In other words, the same amount of premium is owed each year during the term of the policy. In the example, above the policy premium would stay the same in year 1, year 2, year 3, year 4, and year 5. However, let’s say that you decide to renew the policy for another 5 years. In that instance, you would need to pay a higher premium amount each year for the next five years. Premiums normally increase at each renewal.

Why? Well, because the insured is always older whenever you renew. If you are older, the likelihood that the insurance company will pay a claim increases. As a result, the premium increases. Some insurance companies will write a term policy that is 20, 25, or 30 years. In these policies, the premium would generally stay the same for each year in the 20, 25, or 30 years of coverage. However, if the policy renews, the premium would go up. As morbid as it is to say, each renewal you are closer to death – and the insurance company is closer to paying a claim.

In contrast to a term policy, a permanent policy covers one’s entire life. There are several different types of permanent policies that are available, but the most popular one is a whole life policy. With whole policy, the premium amount that needs to be paid does not change. It remains the same. There also is no need to renew, since the policy remains in force (as long as the premiums are paid) during one’s whole life.
Two noteworthy permanent policies are universal life and variable policies. A universal life policy generally allows for flexible premium payments within certain parameters. As long as the owner of the policy pays the minimum amount, the policy will stay in force. The owner has the option of paying more into the policy in order to increase its cash value (more on this in a second). Variable life insurance policies have an investment component to them. In general, the death benefit may increase or decrease depending on how the markets perform during the period the policy is in force. A variable universal life policy combines the flexible premiums of a universal life policy with the investment component of a variable life policy.

Permanent policies generally have a cash value that is associated with them. The owner of the policy can borrow against the cash value of the policy, but if they do this the death benefit will decrease. For example, let’s say that you own a whole life policy with a $100,000 cash value. You take a loan of $20,000 against this policy. If you were to die, the amount that gets paid out to your beneficiaries would be $20,000 less (plus any interest that may have accumulated on the loan). In other words, the insurance company pays itself back for the loan plus interest before it pays your beneficiaries. Your beneficiaries receive less money if there is a loan taken against the policy.

One common myth about permanent insurance is that loans against the policy do not have to be paid back. As shown above, this is not true. In many instances, interest on the loan needs to be paid each year in addition to the normal premium amount. Additionally, unpaid principal on the loan DOES get paid back. The payment is made in the form of a reduced death benefit paid out to the beneficiaries. It should also be noted that only permanent policies have a cash value. Term policies do not. You can only take a loan against a permanent policy. No loans may be taken on a term policy.
Like so many other financial products, neither term nor permanent policies are always the best choice. It depends on what you need and what you are using the insurance for. If you are younger and trying to get the most coverage possible, a term policy may be best. If you want to be able to take loans later on the policy if cash gets tight, then a permanent policy may be the answer.

A common financial planning strategy is to “buy term and invest the difference.” In this strategy, you buy a term life insurance policy with coverage long enough to last until you retire. You then take the difference in premium amounts that would have been spent on a permanent policy and invest these amounts in the market. For example, let’s say that a permanent policy would require a premium payment of $800 per year, but a term policy would only cost $500. If you buy term and invest the difference, you would spend $500 to buy the term policy and invest $300 in the markets (more on investing later).

While there is nothing inherently wrong with strategy, it requires discipline. In my experience, people often will buy the term policy but then simply spend the difference. This creates a less advantageous situation, because the policy will not have a cash value and the money will not be in the portfolio either! If you have trouble saving, it may be best to simply buy a permanent policy.
It is easy to get overwhelmed when you look at all the pieces involved in making sure you have the insurance you need. It is important to remember that all of the items discussed here are important (and in many cases, things you need to do). However, that being said, the cost to obtain all of these items can be substantial. If you can’t afford everything, here is the recommended order for buying these products:

Health Insurance – You need to take care of your body and mind and make sure that you are able to pay for the care your body needs. Your health is an important asset!

Auto Insurance – Remember that it is against the law to drive without insurance. While you can get by without a car, it makes getting to work, grocery stores, and other important places more difficult.

Homeowners/Renters – In most instances, landlords will require you to have renters insurance. While going without homeowners insurance may be possible in rare instances, most mortgage companies will require a homeowner to have it as well.

Disability Insurance – Remember that people do become disabled. The chances of you becoming disabled are much higher than dying any year up until you retire.

Life Insurance – This is not to say that life insurance is not important. As we discussed, it is something that most people do need or want. However, again, your chances of dying in a given year are much less than the chances of you getting sick (health insurance) or becoming disabled (disability insurance). Therefore, if one has to be put off, it should probably be the purchase of life insurance. If you can’t afford it now, try to purchase it as soon as possible. You can generally lock in a lower rate when you are younger.

Frequently Asked Questions