By Rachel Podnos, JDs
Learn more about Rachel on NerdWallet’s Ask an Advisor
Insurance planning should be a major consideration in anyone’s financial plan. Unfortunately, a lack of clear information and predatory sales practices by some agents have made many people wary of buying insurance at all — which could leave them without protection they need.
Although not everyone needs every type of insurance, it’s a good idea to examine the options to make sure you’re adequately covered. Here are three types of insurance policies that tend to be underused and frequently misunderstood.
1. Life insurance
The purpose of life insurance is to take care of those who rely on your income should you die. Despite what some agents may tell you, life insurance should not be viewed as an investment in purely financial terms.
Agents often argue that a cash-value “permanent” life insurance policy is a great retirement savings vehicle because it allows money to grow tax-deferred. While these policies do offer tax-deferred growth, they also come with high annual fees, expenses and surrender charges that drag down your returns. If your goal is tax-deferred investment growth, putting your money into an IRA or 401(k) is a much better option.
If you need life insurance, I generally recommend a term policy. These are much cheaper than permanent polices and are not marketed as investments.
You are probably a good candidate for life insurance if:
- You are married and your spouse would be financially worse off in the event of your death.
- You have dependents. This includes children, parents, grandparents and anyone else whom you provide for on a regular basis.
- You own a large, highly illiquid business. If your estate (and your heirs) would face a hefty estate tax bill when you die, life insurance proceeds could be used to pay those taxes. (This is one case where you might want a life insurance policy even in old age.)
You might not need life insurance if:
- You have no dependents.
- You have dependents but you have enough assets (and proper estate planning) that they would be taken care of if you died.
2. Disability insurance
Disability insurance policies replace your income in the event a disability prevents you from working. Disability policies vary widely, but in general, the more you are willing to pay in premiums, the more coverage you get and the more customized it will be to your situation. Standard disability policies will pay you up to 60% of your income if you become disabled.
For eligible candidates, I recommend having at least a standard long-term disability policy. For many, this is an employer-provided benefit (which ends when you leave the company). If you don’t have disability insurance through a job, consider purchasing a private policy. These can be expensive, but they go a long way toward insuring you against a potential financial disaster.
You are probably a good candidate for disability insurance if:
- You earn an income (this is a requirement) and would suffer financially if a disability made it impossible to work. This is true for most working professionals, and it’s especially important for those who support a family.
You might not be a good candidate for disability insurance if:
- You do not earn income, or your income is spotty and uncertain. In such cases, some providers may refuse to insure you.
- You have significant assets and would not suffer financially if you were to become permanently disabled.
- You are nearing retirement. Disability policies stay in force only while you earn income, and many will only pay out until you reach the age when you qualify for Medicare (generally at 65, but earlier in some cases.)
3. Personal liability umbrella policy
These policies are less well known than many other types of insurance, but they are incredibly important for protecting your assets. Such policies protect you in the event that you are found liable for an injury to someone. For example, say you have $100,000 in liability coverage on your auto insurance. If you cause a car accident and a $1 million judgment is entered against you, your auto insurance will pay $100,000, and a personal liability umbrella policy will cover the damages above that (up to the amount of umbrella coverage you buy).
Almost every working adult is a good candidate for one of these policies. Having enough umbrella coverage is especially important for those with significant assets — but even those with lesser assets should consider an umbrella policy. That’s because when a defendant does not have enough money to pay a judgment, it is not uncommon for courts to garnish that person’s wages.
Also, remember that if you have minor children, you can be found liable for any car accidents they cause while driving a car registered in your name.
On the bright side, these policies are quite inexpensive — about $300 per $1 million in coverage annually. So, no excuses.
Though it can be difficult to find transparent insurance information — and to know how much coverage you will ultimately need — it’s important to be proactive in determining what’s best for you. Educate yourself about insurance and take steps to make sure that your assets are adequately protected.
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