3 Kinds of Insurance You Don’t Know You’ll Need

3 Types of Insurance You Might Not Know You Need

Term Life Insurance

When most people consider life insurance, they think of whole life insurance. You make payments on this policy for a long time, and the benefit remains in place until you die.

Term life insurance works more like an auto policy. You pay a certain amount per year or month for an agreed-upon number of years. If you die while the policy is active, it pays out. If you’re still alive at the end, it doesn’t.

That second piece is the disadvantage of term life insurance. The advantage is it’s much cheaper than a whole life policy. You can buy substantially more insurance for each dollar you spend.

Term life insurance is a solid move for anybody who wants to protect their family during those years when earnings are the most important — when your children are young and your mortgage and car payments are hefty. A term life policy can provide the equivalent of five to 10 years of earnings to manage grief and transition.

Once the initial term policy expires, you can assess your family’s financial needs for the next term. If your kids are grown and you have more savings and fewer expenses, you can reduce or eliminate the policy. If your costs are the same or higher, you can get more coverage for the next few years.

Dos and Don’ts for Term Life Insurance

• DO see if there’s a group term insurance policy available through your job, labor union, trade association, or hobby group. This can make the insurance even less expensive.
• DON’T misstate information about your health, profession, or hobbies. If you do this, the insurer might not mention it when you sign up and pay, but they’re likely to use it to deny payment when your family needs it.
• DO research insurance providers. Term life policies aren’t always made in good faith, but the internet can tell you about any insurer’s reputation.
• DON’T buy more or less coverage than you need. Figure out how much your family would require — for example, a few years of your salary or the payoff value of your mortgage — and stick to that number.

Long-Term Disability Insurance

It’s not common, but a life-changing injury can create immense financial hardship for you and your family in two different ways.

First, it can prevent you from working. In this way, long-term disability insurance is a lot like life insurance, and you can get life insurance that also pays out for permanent disability. Even if you’re able to work, it can limit how much you work — or even force you into a new field with a lower pay scale — so you don’t earn as much.

Second, medical treatment costs can be high, especially if the disability requires you to live in long-term, permanent, or palliative care. Such a situation can drain your savings more quickly than most people imagine.

Long-term disability insurance pays you a set amount — usually a percentage of your average monthly income — to replace your earnings from work while you recover.

Dos and Don’ts for Long-Term Disability Insurance

• DO check the term’s start and end dates. Most policies have a limit to how long they’ll pay out and a required wait period between your first missed check and when they pay out.
• DON’T forget to gather records during your initial treatment to prove your claim more quickly.
• DO look into short-term disability if you don’t have an emergency fund. This covers that initial lag time to bridge the gap.
• DON'T buy a policy that doesn’t include an “own occupation” clause. This clause means you’re covered if you’re hurt and have to change careers. Without it, an insurer might deny a surgeon’s claim because he can’t work as a surgeon but would do fine as a greeter at Walmart.

Supplemental Health Insurance

If you’re fortunate, your employer-provided health insurance has low deductibles or copays and limited out-of-pocket expenses. If not, you may want to consider supplemental health insurance for your health insurance.

Under supplemental health insurance, you get a cash payout each time you spend money on your medical coverage. For example, if you have a $100 deductible for office visits, you could get supplemental health insurance to pay $50 or more of that.

Supplemental health insurance products also sometimes come with a disability payout, making a small but occasionally significant payout for various injuries. The exact details vary from policy to policy, but it might be a few hundred dollars for a broken bone, a few thousand for you to recover from surgery, or or a year or more of your salary for a permanent disability.

Dos and Don'ts for Supplemental Health Insurance

• DO run the numbers. If the premiums for this coverage exceed what you pay out of pocket over most years, it’s not worth buying.
• DON’T assume all policies are alike. These vary more than even other forms of insurance. Do your homework and make side-by-side comparisons.
• DO find a policy with payment flexibility. Many supplemental health policies offer this. It means you don’t have to pay premiums while you’re ill or injured.
• DON’T fail to file once you have the coverage. Even the smaller payouts can add up over time.

Kinds of Insurance You Don’t Need

These kinds of insurance are far from a complete list of insurance products available to you. Some of the others you might need as well depending on your situation. For example, flood insurance will cover your house for flood damage when your regular homeowners policy doesn’t. Most don’t.

However, there are a handful of insurance products almost nobody needs, no matter how hard unscrupulous insurance providers might try to convince you otherwise. These include:

• Debt insurance, which makes payments on your credit cards, car loan, or even mortgage if a disaster or unemployment makes you unable to. It costs too much compared to the risk, and you’re better off putting that money into savings.
• Life insurance for children, unless it carries guaranteed insurability and your child is at risk of a disqualifying genetic disorder. Otherwise, your risk isn’t high enough to justify the cost.
• Event insurance, which reimburses you for a wedding, bar mitzvah, vacation, or similar event if something goes wrong and you have to cancel. Do what you can to minimize expenditures and risks during planning instead.
• Extended warranties, which offer low-cost or no-cost maintenance for an extra year or two after you buy something expensive. These almost always end up costing more than the repairs or replacements unless you get a lemon. In that case, you’re protected in other ways.

Very often, your best bet for financial protection is to save money in an interest-bearing account. Then, you have the cash on hand when you need it and can spend it on something else when you don’t.

About the Author

Joseph Pitre is a San Diego-based insurance consultant.