What Types of Insurance Do You Really Need?

Insurance is one of those things we all have to pay out for, and often resent doing so, but when the storm comes (metaphorical or real), we may well be glad we did.  Having insurance is often compared to carrying an umbrella with you all the time, a bit of an inconvenience, even a burden, but when the rain pours we're glad we have it.  The right insurance policies are an essential part of our financial portfolio, but just which ones do we actually need?

There is no one size fits all answer to this as our insurance needs change as our life and lifestyle changes.  The insurances you need in your early 20s will be very different to what you need in your late 40s, for example.  The best thing is to sit down and consider what problems or circumstances worry you, then to make sure you get insurance to cover those eventualities.  As we go through all the types of insurance out there and consider whether you need them or not, bear in mind that for each one you should get a range of quotes, read the policy carefully before signing, and don't hesitate to ask your broker any questions.  As in all things, knowledge is power.

Health Insurance

In most countries, excluding the UK, a public health care system is either not available or not sufficient for most people's needs, so health insurance is a necessity.  If you have children, you will need to purchase family health insurance that covers them too.  In the US, children can stay on their parents policies until they are 26, but check this for your own country.  Once you are working, many employers will be able to help you get adequate health insurance, but again this may not be the case in all countries.

Disability Insurance

This is another one we don't really need to worry about in the UK, but elsewhere it is vital to obtain this insurance once you are working.  Disability insurance is meant to provide income should you become incapacitated and unable to work.  Anyone who relies on their income for living expenses (that's most of us then!), should have disability insurance.  If you are traditionally employed, disability insurance should be available through your employer alongside medical insurance, but those who are self-employed will need to take out an individual policy.  Like medical insurance, a private policy may offer increased coverage, and this is to be recommended once you have dependent children.  Long-term care insurance is also worth considering if there is no public provision for elderly care needs in your country.  (Don't be tempted by Whole Life insurance instead of separate disability and life policies as the returns on Whole Life are usually dreadful.)

Car Insurance

Car insurance is a legal requirement in most countries and the cost will depend on how long you have been driving, what you drive, where you live, what your job is and other factors.  There are some tricks you can try to bring down the cost of your insurance, whatever your age.  If you are based in the US, check the minimum auto insurance requirements for your state.  However expensive it is, you cannot scrimp on car insurance as it protects both you and other drivers in case of accident.  It also means you will hopefully be able to get a new car in case of freaks of nature like this poor guy:

Home Insurance

Usually divided into two parts, structure and contents.  Based on the fact that you will still own the land even if your whole house is destroyed, the structure part should only cover the costs to re-build your home, not the purchase price which would also include the cost of the land.  To get an accurate estimate, contact local builders for a guideline estimate, or find out how much they charge per square foot and multiply that number by the amount of space you will need to replace.  Don't forget to factor in the cost of fistures and fittings (kitchen, bathroom, staircase), any upgrades and special features.  The contents aspect should take into account any particularly expensive pieces, such as art or antiques, and expensive watches or jewellery, which may need to be listed separately.

While it is not a legal requirement to insure your home, it makes sense to insure the biggest purchase most of us will make in our lifetimes, and contents insurance is vital in the face of fire, flood or other accidental damage.  Remember though that if your property is leasehold (e.g. a flat), you only need contents insurance as you don't in fact own the bricks and mortar, and insuring those is the freeholder's responsibility.

In some countries, a renter's insurance is recommended to cover both the cost of replacing any damaged property and also pay for temporary accommodation should your rented home be uninhabitable.  Costs are low, around $30 a month in the US.  In the UK, we tend to pay only contents insurance when renting, and for student accommodation experts like Endsleigh are the best place to go.

Life Insurance 

This is the biggie, the one most people don't have but probably should.  If you have a mortgage, are married/cohabiting, and/or have children, life insurance is vital to cover your living costs should you be diagnosed with a long-term or fatal illness, or should die.  Most will pay off your remaining mortgage, but the circumstances under which they pay out varies from lender to lender and policy to policy, so read the small print.  Most sources advise getting life insurance of around 10x your annual income.  (Mortgage insurance and critical illness cover are essentially the same as life cover.  It is unlikely you will need more than one of these, so check your policies and cancel anything unnecessary.)

Pet Insurance

This is a tricky one as for some pets, notably cats, you may pay out far more than you ever claim back.  Many would advise putting the same amount you would spend on insurance into a separate savings account so that it is there when you need it, but if you never do you have a nice savings pot.  However, by the same token most people advise taking out insurance for dogs as they usually need to see the vet more.  However, do be aware of the conditions and terms of your policy, as many insist on annual vaccinations, annual health checks and more, and many will not pay out for certain health conditions.  Go through the policy with a fine tooth comb before you sign, and do be aware that pet insurance reimburses you for your costs, you will usually need to pay the vet's bills yourself first.

Travel Insurance

Travel insurance is designed to cover most problems when you travel overseas.  Should your luggage go missing, your money be stolen or you need medical help, even repatriation, a good travel insurance policy will cover it.  Many will also pay out if your travel plans were delayed or cancelled, or you missed a flight through no fault of your own.  but do read the small print, and remember the onus will be on you to prove what went wrong and why.  Sometimes this kind of care may already be covered in your life insurance, home insurance and health insurance coverage, but for a relatively small outlay I think the extra travel insurance is usually worth having.  But, as with all insurance, make sure you shop around, and if you travel a lot an annual policy is probably worth investing in.

If you are a British citizen, make sure you apply for and periodically renew your EHIC card, but remember it is not a direct replacement for comprehensive travel insurance.

Insurance You Don't Need

Credit Card Insurance: Any insurance that claims it will pay off your credit card/loan in the event of illness/redundancy etc is unnecessary.  They only pay off the minimum monthly payment, and most will put so many obstacles in your path that they won't do what they claim to do anyway.  If you have life insurance, disability insurance or similar these accounts will be covered under that policy.

Credit Card Fraud Insurance: Those who worry about credit card theft and fear being had up for thousands of pounds worth of fraudulent purchases may well think this is necessary, but the chances of this actually happening to you are probably the same odds as winning the lottery.  You are only liable for the first £50 or so of fraudulent spending, and the chances of it actually happening to you are highly unlikely anyway.  Just be scam aware but live your life!

Extended Warranties on Appliances: Total waste of money.  If you are worried about your new toaster/laptop/TV going wrong, start stashing some money away in a savings account.  If it does go wrong within the first 6 months/a year, the onus is on the manufacturer to replace or repair it, check your rights.  If it goes wrong after that dip into your savings to replace it, if not you have a nice little nest egg.

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