What Kind of Insurance Do I Need?

Insurance is something that you might not feel is important – that is, until you need it. Having enough insurance is an important part of financial wellbeing. It’s a resource that helps make you feel more confident and secure.
 
Defining your insurance needs can be challenging. The law requires certain types of insurance, such as liability insurance if you drive a car. When you get a mortgage loan, lenders typically require that you carry homeowner’s insurance. Some other types of insurance are completely up to you, such as life insurance.
 
Some people don’t have enough coverage to protect them in an emergency. Others are paying too much for the coverage they have. Finding the right balance can give you peace of mind without overspending.
 
Here are some things to consider as you shop for insurance coverage.

Do I need car insurance? How much?

Drivers in California are required to carry liability coverage. If you’re at fault in an accident, this coverage pays for other people’s repairs or medical bills. If someone sues you for damages, liability insurance also helps cover your legal expenses.
 
There are also several optional auto coverages. Collision insurance pays for car repairs no matter who’s at fault. A comprehensive policy covers losses from events other than a crash like severe weather, vandalism, and theft.
 
If another driver hits you, consider whether you could cover the expenses. Would you need to rent a car while your own vehicle was in the shop? Most standard auto insurance policies don’t cover a rental car after an accident. It might be worth paying extra for optional “rental car reimbursement” coverage.
 
You might also want to get uninsured or underinsured motorists insurance. If you get hit by a driver who either has no insurance or minimal insurance, this coverage kicks in. If the other driver is at fault, your policy can help pay for your car repairs, medical bills for you and your passengers, and your lost wages while you recover.
 
Your insurance agent can explain the various auto insurance options and help you make smart choices.

Do I need GAP insurance?

If you crash your car, your collision or comprehensive auto policy helps cover the costs. (The specific situation must be a covered event, of course.) When you file the claim, your insurer will pay up to your car’s value right before the incident, minus your deductible.
 
But what if the amount you owe on your car lease or loan exceeds your insurer’s payment? In that case, you pay the difference out of your own pocket — unless you have gap insurance.
 
If your car gets damaged or stolen, gap insurance pays the gap between what your vehicle is worth and the amount you still owe on the loan. You may want to consider GAP insurance if your loan or lease balance significantly exceeds the vehicle’s current value. You can always cancel your gap policy once your loan balance drops to match your car’s value.

Do I need life insurance? How much?

Life insurance can ease your mind. It provides a financial safety net for your loved ones after you’re gone, so you can take care of them even after you’re gone. Life insurance can also help cover your final expenses.
 
When choosing a life insurance policy, consider your family’s needs as well as your other financial goals.
 
There are two main types of life insurance:

• Term life insurance lasts for a period of time, called a term. A term policy is affordable and might make sense if you’re budget-conscious and need coverage for a specific time. You may only need coverage while you have a mortgage, for example, or during the years that your kids are growing up. If you outlive your term life insurance policy, your heirs won’t receive a death benefit.
• Permanent life insurance lasts for your entire life. If you want a policy that will replace your lost income to support your spouse, or cover your burial expenses, this is a good option. It costs more than term life insurance but comes with a significant benefit: part of your monthly premium payment goes toward the death benefit, and the rest goes toward cash value. That means you can earn interest or investment gains over time.
   
  Two common types of permanent life insurance are:
  • Whole life insurance. You earn a (usually low) guaranteed rate of return. You can withdraw money or take out a loan against your policy’s cash value.
  • Universal life insurance. This type of policy has lower premiums than a whole life policy. Some types of universal life (indexed and variable policies) tie your cash value to investments, so they’re a bit riskier than whole life. Another type (called guaranteed) offers a minimum rate of return on your cash value. Universal policies give you the flexibility to adjust your death benefit and premium payments, within policy limits.

Once you’ve decided which type of insurance works best for you, calculate how much life insurance you need.
 
One approach, called the DIME Method, involves adding up the four main cost categories that people generally want their insurance to cover.
 
DIME stands for:
 
D – Debt This includes credit cards, mortgage, student loans, car loans, and such.
 
I – Income How much of your income would need to be replaced to help support your family members? Would you like to replace your income for the rest of their lives?
 
M – Mortality What are your burial wishes? What will the cost be?
 
E – Education Do you have young children who will require childcare? Do you want to help fund the education of your kids or other dependents?

Do I need homeowners, renters, condo, or landlord insurance? How much?

Your home is your haven, so you want to keep it safe from perils like natural disasters, accidents, vandalism, and theft. When the unexpected happens, home insurance helps pay to repair or, in some cases, rebuild your home sweet home.
 
There are various types of dwelling insurance:
 

Homeowners insurance

If you own a single-family home, homeowners insurance protects you financially against damage.

What does it cover?

Homeowners insurance protects:

• your home (the structure itself)
• your belongings including your furniture, appliances, and other household items
• your visitors. If someone tumbles down your stairs and takes you to court, your homeowners policy helps pay your legal expenses

Is it required?

If you have a mortgage, your lender likely requires that you have homeowners insurance. If you own your home outright, it’s not required but it does protect your financial investment.

How much do you need?

It’s best to buy enough coverage to rebuild your home if needed, called “replacement cost.” A local real estate agent or building association can help you arrive at the right number.
 
Don’t forget about your belongings. Take an inventory of your possessions and add up their value. You can insure them for either their depreciated cash value or replacement cost (which comes with slightly higher premiums). If you have special items – like pricey jewelry, collectibles, antiques, or art – let your insurance agent know. You may need special coverage.
 
Experts also recommend getting at least $300,000 to $500,000 worth of liability coverage but you may need more to ensure that you’re fully protected. Add up your assets – property, savings, investments – to make sure your coverage exceeds the total.

Renters insurance

If you rent, your landlord’s insurance covers the building. But you’ll need renters insurance to protect your belongings.

What does it cover?

If a fire damages your furniture and clothing, or a burglar snags your jewelry and electronics, renters insurance pays to repair or replace them. It even covers items you have stored elsewhere, such as in a storage unit. And like homeowners insurance, it helps pay your legal expenses if someone gets injured in your home. If your building gets badly damaged and you need to live somewhere else for a while, your renters policy may cover those expenses, too.

Is it required?

The law doesn’t require that tenants carry renters insurance, but some landlords do.

How much do I need?

Make a list of your possessions and add up their value. As with homeowners insurance, you can choose either a policy that pays depreciated cash value or the amount it would cost to replace the item.
 
Most policies come with at least $100,000 in liability coverage, but medical and legal costs can add up quickly, so it’s best to get at least $300,000. Experts recommend that your liability coverage exceeds the value of your total assets.

Condo insurance

If you own a condo or coop, you need condo insurance to protect it.

What does it cover?

While homeowners insurance covers the entire structure of a house, that’s not usually the case with condo coverage.
Condo insurance covers:

• just your unit (in most cases). Your condo association’s master policy covers the overall structure of the building including the roof, lobby, gym, and such. However, some condo association policies also cover unit interiors, including the walls, ceiling, floor, cabinets, and bathroom fixtures
• your belongings
• your legal expenses if someone gets injured in your home. If your dog bites a visitor and they sue, your policy’s liability protection kicks in, compensating you for legal costs

Is it required?

If you have a mortgage, your lender will probably require that you buy condo insurance.

How much do I need?

Review your condo association’s master policy so you understand what it does – and doesn’t – cover. If you’d be responsible for repairing or replacing walls, built-in bookshelves, toilets, and such, add up those potential costs. Also, assess the value of any personal belongings you want covered, noting pricey items like antiques that might require special coverage.
 
When considering liability coverage, financial experts generally recommend matching your coverage to your total net worth to protect your assets.
 

If you own rental property, landlord insurance protects your financial interests. If you own your own home, your homeowners policy won’t cover your rental property, so you’ll need to get a separate landlord policy.
 
Landlord insurance covers:

• the structure of the rental. (Your tenants are responsible for protecting their own belongings.)
• medical and legal costs if someone gets injured on your rental property
• loss of income if your rental property becomes inhabitable. If a fire or mold forces your tenants to move out, landlord insurance compensates you for lost rental income until they can return

Is it required?

Landlord insurance isn’t required by law, although some landlords require that tenants carry it.

How much do I need?

Begin by assessing the cost to rebuild your building(s). If you want to ensure that you’ll be able to cover your rebuild costs even with inflation, ask your insurance agent about guaranteed replacement cost coverage.
Liability coverage helps protect your assets – your own home, your rental property, your other investments – if someone gets injured on your property. As a rule of thumb, the dollar amount of your liability coverage should equal (or exceed) the total value of your assets.
Also consider your potential loss of rental income if your building gets badly damaged or destroyed. Under most policies, you can claim a loss of income benefit for up to 12 months.

Do I need flood insurance? How much?

Floods are becoming more common and can cause serious damage to your home. Most homeowners insurance policies don’t cover floods, but you can buy special flood insurance.
 
If you have a mortgage and live in a flood risk zone, your lender probably requires that you buy flood coverage. You can buy a policy through the National Flood Insurance Program (NFIP), provided by dozens of insurance companies and managed by FEMA, via NFIP Direct. Policies offer up to $250,000 in dwelling coverage and $100,000 to cover your belongings. If your home’s value exceeds $250,000, you can buy excess flood insurance from a private insurer. Excess flood insurance also covers damages that NFIP coverage may not, such as damage to belongings in a flooded basement.
 
Flash floods are increasing across the country, often in places that weren’t prone to flooding before. Some lenders require that you have flood insurance even if you don’t live in a high-risk area. If your home is in a low-lying area or near a body of water – in a FEMA flood zone or not – flood insurance is worth considering.

Do I need earthquake insurance? How much?

If you live in an area that’s earthquake-prone, it makes sense to buy earthquake insurance. This type of coverage isn’t part of most standard homeowners policies.
 
If your home gets damaged in a quake, earthquake insurance covers your home and possessions. It’s important to get enough earthquake insurance to rebuild your home. And if you need to vacate your damaged home until it’s repaired or rebuilt, most policies help pay for living expenses in your temporary digs.
 
California is certainly Earthquake Country. Insurers must offer California homeowners earthquake insurance when they purchase a dwelling policy. Private insurers write about two-thirds of earthquake policies sold in California through the California Earthquake Authority (CEA). (After the 1994 Northridge earthquake, insurers paid out $15.3 billion in claims. The California legislature then created the CEA to protect homeowners and renters while ensuring that all claims get paid.)
 
If you own property outside of California, keep in mind that earthquakes elsewhere are becoming more common. Check your risk so you can make an informed decision.

Getting hitched? Consider getting wedding insurance

Weddings can be pricey. If something goes awry on your big day – extreme weather hits or your caterer is a no-show – wedding insurance compensates you for the financial loss.

Do I need an umbrella policy? How much?

Umbrella insurance gives you extra liability protection that goes beyond what your standard insurance policies offer.
 
Let’s say a visitor is bouncing on the trampoline in your backyard and gets injured. Their medical expenses and lost wages total $500,000 but your homeowners policy provides only $200,000 worth of liability coverage. You’ll need to pay that $300,000 difference. If you have a $1 million umbrella policy, however, that insurance will pay the $300,000. Insurers usually sell umbrella insurance in increments of $1 million. It’s best to get enough coverage to match your net worth.
 
If you cause an accident that injures several people – or one person seriously – your auto liability coverage may not cover the medical bills. A generous umbrella policy, however, will cover those expenses.
 
Umbrella insurance makes sense if you have a high net worth or if your risk is higher than average. If you tend to entertain a lot, for example, an injury is more likely to happen at your home. That’s especially true if you have a swimming pool, for example, or a swing set.

How to decide on types of health insurance

When choosing a health plan, there’s much to consider.

Where will you get your healthcare?

If your workplace offers health coverage, open enrollment for your employer health plan likely runs for a few weeks in October and November.
 
If you’re 65 or older, you’re eligible for Medicare, with open enrollment from October 15 to December 7. (If you’re younger, you may be eligible for Medicare if you have a disability, end-stage renal disease, or Lou Gehrig’s Disease/ALS.)
 
If you’re self-employed or your employer doesn’t provide health insurance, you can buy coverage through the Health Insurance Marketplace. This government-run service offers plans from private insurance companies, with open enrollment from November 1 to December 15.
 
Medicaid is a low to no-cost health insurance program offered by the state and federal government. Medicaid eligibility varies by state and household circumstances.

Are your doctors in the plan’s network?

When shopping for health plans, you can often enter doctors’ names into the insurer’s website to see if they’re in-network. If not, give the insurer a call to ask. You can also ask if they cover your medications.
 

What will the plan cost?

You might find a health plan with a low monthly premium, but it’s important to consider other costs, too. A plan with a low premium may have a higher deductible, which is the amount of money you’ll pay out of your own pocket before your insurer starts to pay.
 
If you have a $7,000 deductible, you’ll need to pay $7,000 in health care expenses each year before your insurer starts paying its part of the costs. If you’re healthy, this type of plan might make sense. If you take the highest deductible plan available to you, you could make up the difference with an emergency fund that is large enough to cover that deductible.
 
If you have a chronic condition or have kids, you might choose a plan with a higher premium. Your monthly bill will be higher, but you’ll keep your out-of-pocket costs under control.
 
If you get a health plan through your workplace, talk to your benefits administrator, who can help you decide which plan to choose. Otherwise, talk directly with the health insurance company. They can guide you toward the type of plan that is best for you.