3 Kinds of Insurance You Need -- and 3 You Don't

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Getty ImagesWhile you should hold off on purchasing some types of insurance, investing in homeowners and auto insurance is a good idea.

By Geoff Williams

There isn't a lot of talk about insurance in school. So when we become adults, we're left to consider the dizzying array of insurance policies on our own and wonder if we need all of them, just some, or none of them. It's almost as confusing as learning the Pythagorean theorem and the periodic table of elements.

So if you're new to the world of insurance or you could use a brush-up tutorial, here is a somewhat subjective list of the types of insurance you absolutely need, types you may want and those you definitely don't want to buy.

Insurance You Need

Homeowners insurance. If you own a house, your bank will require you to have homeowners insurance. In fact, "if someone loses their homeowners insurance for some reason – cancellation, nonpayment, nonrenewal, then the bank is notified," says Dan Weedin, an insurance consultant in Seattle. "They will immediately place their own insurance in it and bill the homeowner. Then they will give the homeowner a chance to get their own. The bank will not allow it to go uninsured for any length of time."

Unless you've paid off your mortgage, there's really no way out of homeowners insurance.

Auto insurance. This is another must-have. In fact, it's against the law to drive without some sort of coverage. If you're caught driving without insurance, you probably won't go to jail, but your driver's license will likely be suspended and you'll be fined.

Health insurance. If you are 25 or younger, you don't need to buy health insurance, assuming you're still covered on your parents' policy. But otherwise, add it to your list. According to Healthcare.gov, in 2014, if you don't have health insurance, you'll have to pay whichever is higher: either 1 percent of your yearly household income or $95 per uninsured adult ($47.50 per child under 18). In 2015, the fee will be 2 percent of your income or $325 per person, and in 2016, it'll be 2.5 percent of your income or $695 per person. In 2017 and beyond, the fee will be adjusted for inflation.

Insurance You May Need

Disability insurance. Regi Armstrong, president of Armstrong Wealth Management Group in Florence, South Carolina, casts his vote for disability insurance as something everyone should consider getting. "Disability insurance replaces one's income if we become incapacitated during our working years," he says. "It's very important when only one person in the household has an income or one has a much larger income than their spouse."

Life insurance. Generally, people buy a life insurance policy after they're married or have a child. As Laura Adams, a senior analyst at InsuranceQuotes.com, says, "It's critical when your death would create a financial hardship for those you leave behind."

Adams also points out that there may be some unmarried, childless people who should get life insurance. "For instance, if you cosigned a car loan, student loan or credit card with a family member or friend, they would be responsible for the entire debt if you died," she says.

Umbrella insurance. Think of this as insurance for your insurance. "It's an extra amount of liability coverage in $1 million increments that protects over and above your personal and auto liabilities if they become exhausted," says Weedin, who thinks middle-class individuals and families and those in the upper middle class and higher should consider umbrella insurance. "Generally, a family can add this policy for between $250 to $300 a year," he adds.

Whether you need umbrella insurance depends on what you have to lose and how concerned you are about getting hit with a lawsuit. After all, even if you aren't worth millions, somebody could sue you as if you were. That worry is why umbrella insurance exists. "It's very important for those who might be the targets of lawsuits, like physicians and business owners," Armstrong says.

Insurance You Don't Need

Credit card insurance. In general, stay away from any type of coverage that would pay off a credit account, whether it's a credit card, mortgage or car loan, Adams says. "You can get this coverage by having enough regular disability or life insurance and avoid this duplicate coverage," she says.

True, many homeowners who don't have a large enough down payment are required to buy private mortgage insurance and pay it monthly until the loan balance reaches 78 percent of the original value of the home. But otherwise, these types of credit insurance are only good deals for the insurer. For instance, credit card insurance, which kicks in if you have trouble making your payments due to, say, job loss, won't pay off the entire debt on your credit card – it will just make your monthly minimum payment for you. And some people say it's challenging to get credit card issuers to actually make those payments.

Credit card fraud insurance. People who worry about credit card theft and are fearful that they'll be on the hook for thousands of dollars of fraudulent purchases tend to purchase this. But the odds that you'd have to pay in this scenario are virtually nonexistent. "It's typically overkill," Adams says. "Your maximum liability is limited to $50." This applies to all credit cards.

Life insurance for a child. Some people buy these policies in case the unthinkable happens to their child, figuring at least there will be money for a funeral. But your child would be far better off if you had a brighter outlook and put that money into a college savings account.

Look at it this way: Insurance exists to help you replace or recover what you've lost. The more expensive that loss is, the more likely you need insurance. That's why homeowners, auto, health and life insurance are so important, and things like an extended warranty on an appliance are a waste of money.

But life insurance for the loss of a child? No insurance policy will help you recover from that.

3 Kinds of Insurance You Need -- and 3 You Don't
For many employers, open enrollment season for some benefits happens in October. This usually sneaks up on some people, who scramble to decipher benefits and make elections last minute. Although you won't be able to see the options until the enrollment period opens, take time now to review your benefits. Are you taking advantage of any 401(k) matches? Are your fully funding your Flexible Spending Account? What about employer offered life and disability insurance? (A fun infographic from the Council for Disability Awareness shows your risks). Maximize your benefits and don't leave any money on the table.
Back-to-school time can be expensive if you're not prepared. Money is spent on clothes, books, supplies and technology -- and that's before the doors to the classroom have even opened. Before hitting the stores, do these two things:
  • Conduct an online search for "coupon code" along with the name of any store you'll be shopping at. Typically you can find some great online deals.
  • Get a list from you class or teacher of specific type of notebook, calculator, etc. required. If you can't get child's "must haves" from ahead of time, buy just the bare minimums until school starts and the list is available.
It's hard to think about the holidays when we're just making it through summer, but now is the time to build up a financial cushion. Set yourself up with an automatic transfer to a separate savings account and participate in the Holiday Fund Money Challenge to build up a savings of $450. How much do you need for the gifts, travel, parties, entertaining, food and other holiday activities you anticipate? Planning will help to ease the stress that comes around the holidays.
In lieu of scrambling at the end of the year to make contributions to retirement accounts by Dec. 31, double-check your contributions now and determine if there's room in your cash flow to allow for an increase to possibly max out by year end.
Summer is a typically a time of transitions. There are weddings, moves to new homes, possibly a new family addition and more. If summer is the time when these events take place, fall should be the time to take stock of how they're panning out. If you're recently married and haven't already, now is the time to have the money talk with your spouse and make decisions about spending plans, merging (or not merging) accounts, beneficiary updates and more. If you've moved, check out how the new location has affected your cost of living spending in terms of activities, gas costs, groceries and more. Ultimately with any transition, you need to review your spending plan and determine what areas (if any) need to be adjusted.
If you're lucky enough to live in one of the states that actually experiences seasons, fall is the time to prep for energy savings by caulking and weatherstripping doors and windows, turning your thermostat back for a fixed period each day and insulating your attic, basement or outside walls.
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